The Australian Small Business and Family Enterprise Ombudsman (ASMFEO) recently announced it was undertaking research into what fintechs can do better to cater to small-to-medium businesses, saying that startup lenders have the potential to fill the gap left by traditional bank lenders.
Fintech lenders are online, marketplace alternatives to a bank. Smaller and more agile than the big banks, these can offer a broader array of lending options with a far more streamlined application process. Importantly, fintech lenders are more willing to lend to SMEs with a limited credit history.
The ombudsman Kate Carnell said there were some issues with the transparency of fintech lending products, and that it was not always easy for small businesses to assess which fintech lending option was best for their business.
But perhaps we need to take a step back and question whether fintech lending is something a business needs to be considering at all?
Easy borrowing can make things worse
Fintech lenders target riskier businesses like startups, which means they’re justified in charging higher interest rates. Over the short term, these rates might not seem astronomical, but once they are compared with standard rates over a year, costs escalate.
Added to this is the fact that many fintechs quote their rates in sometimes misleading terms. 1% per fortnight sounds reasonable, but that equates to 26% per annum, which is five times the current average home loan rate and double the average overdraft rate.
These kinds of loans can sometimes exacerbate a cash flow problem because, while it has plugged the cash gap, the higher interest rates and on-going costs can create a bigger hole down the road.
In a worst-case scenario, a small business is unable to meet repayment, defaults, and its credit history is seriously damaged. These loans are a band-aid solution at best, and a better option is to invest time and money into collecting overdue payments.
Go get what you’re owed
Australian small businesses are owed collectively about $26 billion. Setting up the right framework and practices to recoup some of that money can not only solve cash flow problems, it can create better customer relationships and improve the value of a business.
Here are 10 tips for getting your customers to pay up:
1. Communicate with your customer before a payment is due. A good way to stay on top of your customer’s mind is to continue to support them after you’ve made the sale. Genuinely reach out with the purpose of connecting and adding value. Take the opportunity to check their satisfaction with your goods or services, how stock is moving, and if they need anything further from you.
2. Invoice immediately. Every day that a bill goes unpaid is costing your business money. It is the opposite of cashflow – it is cash that is not flowing through your business. Issue your invoice as soon as the order is made or delivered. When sending your invoice, include your business name and ‘invoice’ in the subject field – you’ll get a better open rate.
3. Send your invoice to the right person. It’s surprising how many invoices fall into a ‘black hole’ if they are not addressed to the correct person. Make sure you send the invoice to someone who can action it – usually someone on the accounts team – and record those contact details in your customer relationship management system (CRM).
4. Accept credit card payments. Accepting online credit card payments makes it easy for customers to pay you — customers can pay 24/7 and they don’t need to rely on having cash in their bank account.
5. Add a ‘PAY NOW’ button to your emails and invoices. A simple Pay Now button on emails and/or invoices, leading to your online payment gateway, means your customer is one click away from paying your invoice quickly and securely.
6. Group all outstanding invoices into one statement. Avoid bombarding a customer’s inbox with multiple overdue statements. Make it easy for your customer to see how much they owe and reduce the likelihood of a customer not paying because they didn’t understand your invoices.
7. Send reminders. Research from ezyCollect shows that most overdue invoices require at least two reminders before a customer pays, with multiple modes of delivery getting the best results. In other words, a combination of email, SMS or posted letters.
8. Map and track your accounts receivables. Your business should be able to pinpoint priority problem areas quickly. For this, you’ll need deep data about your accounts receivables so you can assess the impact of overdue debt on your cash flow.
9. Escalate to debt collection or legal action. You didn’t go into business to start legal action with your customers, but remember, you didn’t go into business be a bank for them, either! Referring your customer to a debt collection or legal agency doesn’t mean your payment problem will escalate into a court case; even a simple demand letter from a third party can be enough to prompt an outstanding payment.
10. Thank your customer for payment. Never underestimate the power of a timely ‘thank you’! A simple thank you email is positive reinforcement that you are monitoring your accounts and that you appreciate their business, and it encourages timely payments in the future.
Raj Kuckreja is the co-founder of Sydney fintech ezyCollect.