Three ways the tech industry is damaged by debt

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Debt is becoming a frightening reality for many SMEs within the United Kingdom. However, the situation becomes more desperate when your customers failing to pay is the root cause of it all.

A recent survey by Liberis - an alternative business finance provider in the UK - asked 400 UK SMEs about the impact that aged debt has had on their business. They found that an astonishing £14.9 billion is currently being chased in late payments from debtors.

But how do the effects of aged debt vary between different industries? The survey revealed that the IT and technology sector was the second most affected by aged debt, and as the tech industry is growing rapidly, the need for covering aged debt is crucial otherwise opportunities for investment will remain slim. 

Here are three of the main reasons why tech businesses are struggling with debt from clients. 

1) Minimal cash flow is halting re-investment

There are more tech company start ups than any other type of business (Startups). According to UKTN, the number of software and computer programming companies rose from 2,325 to 5,995 last year. However, with so many tech companies affected by unpaid bills, cash flow problems will inevitably follow suit, meaning these start-ups may struggle to re-invest into their business.

Being owed money affects any business’ cash flow. But considering so many new tech businesses started up last year, re-investing profits to expand and stay competitive is crucial. However, this becomes much more difficult when businesses are spending up to three days a month chasing late customer payments.

One avenue that is particularly affected by cash flow is paying employee’s salaries.  Vinnie Morgan, founder of BookingLive who provide online appointment software for SMEs, discussed in an interview how he resorted to using his own savings to control cash flow issues after two big clients went into liquidation, owing his business £100,000:

“We’d get to a point where invoices were months late. They were by far our largest customers at the time and to lose a third of your income when you’ve delivered all the work was terrible. I’d been working for years to save up enough to buy a house and had to put that in to cover cash flow. I wanted to keep morale up and not make staff worry. It probably set us back 12-18 months.” (The Guardian).

As more SMEs are struggling to recover from the cash flow issues caused by aged debt, it’s unsurprising that respondents in the Liberis survey listed “not being able to buy new equipment” and “not being able to pay or hire staff” as key problems in causing them to “put plans to expand on hold”.

2) No cash means out of date equipment

Equipment and software is at the heart of any tech business. However, if tech businesses are struggling with cash flow problems caused by aged debt, they will inevitably be unable to keep their equipment up to date.

Staying innovative is key for the survival of tech businesses, which is why most are re-investing to develop their offering. For example - last year, almost half of all UK firms were subject to a cyber breach or attack (gov.uk), with out of date antivirus software being a common cause.

SharkGate, providers of website security, decided to combat these attacks and developed a website called ‘One-hour Site Fix’, which promised to fix a website fast and for free as long as the owners took out subsequent cover. This innovative investment helped SharkGate stand out against its competitors as they were able to offer quicker fixes and emergency solutions to cyber-attacks.

Shane Redding, marketing consultant at SharkGate, said that investments in perfecting the product were crucial to making their offering global: “The company recognised the need (for quick cyber security) was worldwide, so did not restrict its offering to any one geographic market and, as a result, has customers around the globe”.

For tech businesses, having out of date equipment, such as their antivirus software, increases the likelihood of data breaches. Unfortunately for SMEs within the tech industry who are suffering from aged debt, the lack of funds means they’re unable to purchase the necessary equipment to prevent their business from succumbing to potential data breaches.

3) Rejected finance applications

The impact of aged debt is leaving many SMEs struggling to fill the cash void it has caused. According to the Liberis survey, 30 per cent of small businesses said they have, or would consider, sourcing additional business finance to cover cash flow issues caused by defaulting debtors. Within the tech industry gaining access to additional finance is crucial for covering the cost of new equipment, repairing current equipment and providing clients with the latest software.

However, obtaining additional finance can be difficult when aged debt is in the background. Having mounting aged debt on top of your business makes you less attractive to lenders - how can you possibly afford to keep up the loan repayments if you are unable to clear existing debt?

Although banks used to be one of the most common methods of obtaining a loan, it is estimated that half of UK start ups fail within the first five years, and the lack of bank lending is one of the main causes (The Telegraph).

One entrepreneur who has been affected by lack of bank funding is Fiona Jarvis, founder of Blue Badge Style, which has caused her to dip into her own pension: “Hopefully I’m going to build a company that will be worth more than my pension. You just can’t get bank loans. My bank said I’d have to be turning over £1m. That’s hardly a small business” (The Guardian).

The issue of banks failing to lend additional finance to start ups means other methods of finance can be considered, for example, a business cash advance could plug a cash flow gap temporarily. However, keeping a close eye on client accounts and being firmer with credit control will stop unpaid invoices from building up in the future.

Rafferty Gifford is a digital marketing specialist at Liberis
Image source: Shutterstock/MaximP