The EU referendum result has created a lot of talk about uncertainty for smaller digital businesses who are looking closer at how they manage their cash flow. Two big problems that firms in this space suffer from are their invoices being paid late and difficulty in accessing working capital.
Believe it or not, some ad tech firms are asked to wait up to 150 days to be paid for campaigns they’ve worked on. There are even reports that some agencies and big brand advertisers are using Brexit as an excuse to tighten payment terms and hold on to funds for longer. This Brexit insecurity extends to traditional banks, many of which are now even more nervous about lending to digital businesses, only adding to cash flow worries as these large institutions ignore the nuances of the digital media industry. However, all is not lost. Small businesses that make wise decisions when it comes to financing can achieve strong growth, in spite of economic negativity and doom-mongering, at a time when global media spend is soaring.
With Christmas around the corner, now is the right time to nail down a solid strategy for working capital. Digital businesses must make the most of the large Q4 campaign budgets and the rise in conversions to ensure consistent growth as we move into 2017. You don’t need to hold back on ambitious plans because you are still waiting to be paid for work you carried out in Q2.
A quick glance at the latest IPA Bellwether Report reveals that more UK firms increased advertising spending budgets in the third quarter. In fact, the research by HIS Markit on behalf of the Institute of Practitioners in Advertising (IPA) shows that 13.4% of companies increased spend in Q3, up from 10.7% that allocated more money to campaigns in Q2. This is all promising stuff, and in order to get a bite of the action, small agencies and vendors need to maintain the confidence in targeting big brand clients even if these companies subsequently try and impose lengthy payment terms.
Although it’s a reality in the digital industry that few companies are brave enough to risk annoying large advertisers or agencies by charging interest on a debt or insisting an invoice is paid within 60 days, a really important point to remember during negotiations is that every business can try to tighten its own payment terms. By having an honest discussion with clients, it might be possible to reduce the time it takes to get paid from 95 days to 85 days, for example. This would make a small but noticeable difference for many businesses.
Why should a digital business wait 90 days-plus to receive more than £500,000 owed by clients when - once the right checks are made on outstanding invoices - it can be in its bank account within 24 hours through the various credit options, like debt financing, that are on the table? Once the cash arrives it is available immediately for marketing, buying media and recruiting digital talent.
The financial technology sector has exploded over the past few years and there are plenty of intelligent fintech credit and payment providers helping start-ups and early stage companies in this troublesome economic climate.
Fintech brands are also helping smaller digital businesses fill the funding gap between the angel investors who are keen to invest in them early on and the venture capitalists (VCs) that prefer to wait a few years before pumping in their money. It can be really tempting for businesses to take VC cash for day-to-day financing to pay staff and rent, especially from a well-known big investor, but such a plan should be resisted because it means losing equity and control of the business.
It is unclear whether, post-Brexit, the UK will repeal the EU’s Late Payment Directive which came into force in 2011 specifically to help small businesses fight late payments and improve cash flow. The best option is for digital companies to manage their cash flow more effectively and consider disruptive methods to raise valuable working capital.
By Matt Byrne, UK director, FastPay