As prices surge and the UK economy continues to shrink, David Brown, founder and chief executive of Hi, writes that businesses need additional financial levers to tackle the current cost of living crisis.

Costs are surging, wages are inflating, and the economy is shrinking. Businesses now more than ever, require additional financial levers to get through this cost-of-living crisis.  

UK firms have been particularly hard-hit by the economic slump. 

Inflation is at a 40-year high, energy costs are soaring, and there are ongoing supply chain issues affecting businesses across the country. 

The Office for National Statistics has published updated data which indicates that gross domestic product (GDP) fell 0.3% between March and April.

Businesses are currently using levers such as supply chain finance (SCF), which finances working capital, however, many are ignoring their biggest expense – payroll. 

UK companies need to get creative and explore how additional financial levers such as pay asset finance can preserve working capital and avoid expensive debt.

Poor access to finance

Many UK firms are struggling to access the vital finance they need to keep their heads above water during these challenging economic times. 

Creditors hate uncertainty – which is being exasperated by the current political and economic context – making it much more difficult for small businesses to secure loans.

Banks will be risk-averse particularly while the UK government deals with ongoing Brexit impacts, rising inflation, and the continuing uncertainty around the long-term economic outlook. 

The Bank of England has attempted to stem the soaring prices by raising interest rates to 1.2%. 

This will only increase the cost of borrowing for small businesses and could potentially reduce customer spending, negatively impacting profit. 

The shrinking of the sterling credit markets shows that investors are worried, there already was an additional overhang in sterling credit which priced in lower liquidity. 

UK corporates that need liquidity and are struggling with the inflationary environment may struggle to service their debts or raise more capital to keep their businesses running.

A growing interest in SCF

Supply chain finance (SCF) has become increasingly popular with the COVID-19 pandemic forcing firms globally to take greater advantage of trade finance instruments to ensure quicker access to working capital for themselves and their suppliers.

According to a recent SCF report by McKinsey, buyer-led SCF is now the fastest-growing segment of the $7 trillion trade finance market and is expected to post 20-24% growth in the five years to 2024.

While SCF can be seen as a small step in the right direction, it is not without its limitations. 

One of the major issues with SCF is its scalability down to small suppliers. 

Most small suppliers struggle to access SCF programmes because providers can’t justify paying the host of checks required including know your customer (KYC) and anti-money laundering (AML) checks. 

The few suppliers that are large enough to be on-boarded by the SCF provider will still have payment significantly delayed because a supplier’s work doesn’t start the day an invoice is issued. 

This means that employers, especially SMEs, need alternative financial levers as prices surge

Pay asset finance 

There is a better alternative to traditional borrowing and supply chain finance schemes: pay asset finance.

Payroll financing or pay asset finance (PAF) is a process in which an employer’s payroll is processed into a form a funder can finance. 

This money is then made freely available to the employee, increasing their cash flow and reducing the wait for payday.

Businesses can defer payroll for weeks and release capital back into the company, boosting cash flow and freeing up liquidity. 

Employees can decide when they want to access their pay, helping to increase financial freedom, flexibility, and well-being while eradicating the feast or famine cycle of monthly payments, which are all more important than ever given the current cost-of-living crisis. 

Market research shows that more frequent pay improves attendance, retention, and performance. 

It also hints those employers will benefit in the long run by attracting and retaining the best talent, improving wellbeing and productivity while reducing absenteeism. 

Cash is the lifeblood of any company, and it is estimated that PAF would make $20.3 trillion available in OECD countries. 

This creates a win-win for employers and employees and could provide a timely boost to the global economy.

Read the latest issue of Trade Finance Talks, July 2022