Many SMEs are struggling to stay afloat financially as a result of the corona measures. They experience difficulties in repaying corona debts, leading to the postponement of repayments, taking out new loans and paying suppliers later. Research shows that more than half of the SME entrepreneurs who have applied for coronanood support see repaying it as a huge challenge. Nearly half of them take on new debt to pay off old loans. So far, nothing new.
What’s interesting here, though, is the fact that SME entrepreneurs are less and less likely to turn to traditional banks because they often can’t get financing there. This leaves them reliant on alternative and more expensive financiers, such as factoring companies, which already currently provide 27% of all SME loans up to €1 million. This imposes additional costs on entrepreneurs who are already struggling.
There is a growing trend of entrepreneurs seeking alternative forms of capital, such as factoring and flash loans. Entrepreneurs try to plug holes in their finances by, for example, taking out flash loans with high interest rates, running up rent arrears and paying suppliers later. In addition, entrepreneurs need additional capital to invest in growth, on top of paying (rising) wages and inventories. Capital-intensive companies especially struggle with this because they have already invested heavily but have yet to generate the revenue. This leads to working capital problems.
Payment delays among SMEs can have various effects on the entire economy:
- Supply chain disruption: If an SME cannot pay its suppliers on time because of late payments, it can lead to supply chain disruptions. Suppliers, in turn, may have problems paying their own suppliers, which in turn results in delays in production and ultimately reduced availability of goods and services.
- Bankruptcies: When payment delays persist and SMEs are unable to meet their financial obligations, it can result in bankruptcies. Bankruptcy affects not only the company in question, but also the employees who lose their jobs. This can lead to a rise in the unemployment rate and a decline in consumer spending, which in turn negatively affects other businesses in the economy.
- Reducing investment and growth: Payment delays can lead to financial strain and liquidity problems for SMEs. This may limit their ability to invest in new projects, expansion or innovation. Less investment often also means less growth, which can slow overall economic activity.
- Lender risk aversion: As a result of late payments, lenders, such as banks, may become more reluctant to lend to SMEs. They can sharpen their risk assessment and apply stricter criteria when evaluating loan applications. This can make it harder for SMEs to access financing, limiting growth opportunities.
- Macroeconomic impact: If a large number of SMEs face late payments and financial problems, this can have a broader impact on the economy as a whole. SMEs play a crucial role in many economies, including for job creation and their contributions to economic growth. A weakening of SMEs can thus lead to a slowdown in a country’s economic growth and recovery.
In short, late payments by SMEs can lead to supply chain disruptions, bankruptcies, reduced investment and growth, lender risk aversion and even broader macroeconomic consequences. It is therefore important to support and ensure the financial health of SMEs to eliminate negative impacts on the entire chain.