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Small Business Saturday: how open banking helps to tackle late payments and SME lending

06 December 2024

As we celebrate Small Business Saturday on 7 December, there is no better time to reflect on the importance of the UK’s 5.5 million small and medium-sized enterprises (SMEs). It’s no secret that these businesses form the backbone of the economy, employing around 50 per cent of the workforce and generating over half of the nation’s turnover.

However, firms and sole traders are often hampered by late payments from larger organisations, a persistent problem that stifles growth and productivity. Recent reports show SMEs are losing an estimated £22,000 per year due to late payments. There are wider implications for the economy too, such as reduced productivity, and roughly 50,000 business closures yearly – largely as result of late payments.

But open banking-powered tools and services – often utilised as part of firms’ cloud accountancy packages – can help alleviate some of the pressure SMEs face in managing late payments, cash flow challenges and even cost-effective borrowing.

And while one in five of the UK’s SMEs already leverage open banking to better manage their finances, there is untapped potential for those other small businesses to use it to digitise operations, reduce administrative burdens, and unlock cost savings.

By enabling secure data sharing between financial institutions and authorised third parties, open banking offers SMEs the opportunity to better manage their finances and cash flow by accessing real-time banking data, giving them a clear, up-to-date view of their cash flow and transforming their bookkeeping.

Accounting software can also automate payment reminders, reducing the administrative burden on business owners and prompting timely payment of invoices.

Leading accountancy firm Xero recently reported that 75 per cent of consumers believe large businesses should be encouraged to improve their payment culture, and 70 per cent would be more likely to buy from businesses that pay their suppliers on time. The integration of open banking and open finance can help shift this cultural norm by providing small businesses with the tools to hold their clients accountable.

By using digital tools to automate invoicing, track payments, and access financing, SMEs can monitor and track payments before they become late, and gain more control over their cash flow.

And as the Data (Use and Access) Bill progresses through Parliament and open banking expands into smart data, building on open banking’s secure data sharing principles to deliver similar efficiencies, businesses can benefit further.

Open finance, the next step in open data sharing, can help to unlock better decision-making for business lending. For example, the Bank of England found that 77 per cent of businesses would rather grow more slowly than borrow indicating that securing loans is time consuming and unsuccessful.

A recent report by the Centre for Finance, Innovation and Technology revealed that more than a quarter of SMEs who risked missing out on credit could get access to finance with enhanced data-sharing, helping to address the decline of traditional SME lending.

Small businesses can share financial data with multiple – and alternative – lenders, increasing their chances of securing loans or credit lines. By allowing lenders to access richer, more accurate data about their business’s financial health, open finance can facilitate faster lending decisions, often offering more flexible and tailored repayment terms.

Small Business Saturday is an opportunity to highlight the brilliant work of our SMEs and support them in every possible way. By advancing the Data Bill rapidly and embracing smart data solutions such as open banking and open finance, we can help create an environment where small businesses are no longer stalled by late payments or inflexible credit, enabling them to grow, invest, and contribute to the growth of UK Plc.

This article also appeared in Business Reporter.