Small businesses face a ‘trade credit crunch’ as a backlog of unpaid invoices builds up according to research by iwoca which shows that 40% of businesses are currently facing debts of over £10,000 in unpaid invoices.

Iwoca says that businesses face considerable disruption with unpaid invoices meaning that as many as one in four company’s doubting they will survive into 2021.

The research, published in “Levelling the ‘paying’ field” report explores how payment terms were managed pre and post-pandemic and sets out a series of recommendations that policymakers and small businesses should prioritise in the months ahead.

As non-essential shops open next week, the mounting pressures on small businesses are leading as many as a third of owners (who offered payment terms) to consider reducing or not offering trade credit in the future as they try to minimize their exposure to unpaid invoices. A fall in access to trade credit, which according to the SME Finance Monitor over a third (37%) of businesses use, could have significant consequences for small businesses who rely on it and the wider sector.

The findings come as iwoca also launches a new product that will help businesses navigate the crisis – iwocaPay. The tool can take the risk out of payment terms and give confidence back to businesses offering trade credit. iwocaPay gives customers a choice over when they make repayments, allowing them to choose payment terms of up to 90 days. At the same time, suppliers will be paid immediately through iwoca. Addressing the needs of both business customers and suppliers will help improve cash flow and give greater confidence to small businesses as they return to work in the coming weeks and months.

The proportion of SME owners that owe large payments to their suppliers has nearly doubled. iwoca small business customers reported that their amounts owed to suppliers has risen since the coronavirus hit. 6.3% reported owing between £20,000 – £50,000 – almost double the proportion from last year (3.7%). A further fifth of small businesses in this survey reported that they currently owe their suppliers between £1000- £4999 – up from 13.8% at the same point in 2019.

At the same time businesses are asking for longer payment terms from suppliers. With the coronavirus taking its toll on sales, small businesses appear to be trying to hold off on making payments to protect their liquidity. iwoca’s research found that in the past 30 days, two fifths of respondents (41%) asked their suppliers to extend payment terms to give them more time to complete a payment. By comparison, in the year leading up to the outbreak of coronavirus, only one quarter (27%) had requested longer payment terms.

But naturally as suppliers haven’t been paid and are being owed almost twice the amount already, they are demanding payment up front or shorter payment terms. As a result of the challenges caused by the pandemic, one third of small business suppliers (34%) said they are more likely to either ask for immediate payment or shorten their payment terms in future. This could result in a trade credit crunch, as suppliers demand earlier payments from small businesses who increasingly require longer payment terms.

Christoph Rieche, Co-Founder and CEO of iwoca said “What’s emerging is a concerning game of ‘tug of war’ between small businesses as they look to survive and plan for the future. Buyers can’t pay their invoices because they don’t have the revenues and sellers are being asked to provide longer payment terms to ease the strain whilst already sitting on a growing backlog of unpaid invoices.”

“Coronavirus can and should help trigger a step-change for small businesses to become more efficient, productive and resilient. We believe the first and most obvious change is to make payment terms fairer between suppliers and customers.”

Mike Luxford, founder of MLCS, a cloud-based internet phone system provider (VoIP) asaid “The first thing I thought when this all started [the pandemic] was, we won’t get paid. When you’re a small business, that’s when the issues start. And it’s a knock on effect – if I’m not getting paid, it clogs up my credit accounts which means I can’t take on more contracts. I try to have some savings around so it’s not literally hand-to-mouth because if a silly little payment trips you up, you lose all your credibility. For that reason, if someone wants extended terms or huge amounts of credit for no reason, I tend to walk away. Otherwise it becomes a daft juggling game.”