Exclusive: ‘Plugging the invoice gap’ – Lara Gilman, iwoca in “The Paytech Magazine”
Small business finance platform Iwoca saw an opportunity during the pandemic to address a persistent problem for SMEs – getting paid ontime. Lara Gilman believes it could be the start of something big
Not all heroes wear capes and those coming to the rescue of UK SMEs don’t have to be big, either. They just need to be clever.
The COVID-19 pandemic has seen SMEs in dire need of support. A recent survey of small business owners by digital business financing specialist Iwoca showed that well over half (59 per cent) had used their own cash to keep their businesses afloat last year. Furthermore, 38 per cent of SMEs were concerned they would have to close their doors in 2021, such has been the economic impact of two very damaging lockdowns.
That isn’t just down to revenue drying up, though. In many cases, businesses made sales, but they couldn’t collect the payments. That was brought home to Iwoca in the middle of the crisis. Since 2012, it has focussed on extending credit to SMEs based on revenue flow. During the last year or so it’s been busy distributing well over £200million of much-need
government-backed support under the Coronavirus Business Interruption Loan Scheme (CBILS), too. But it’s now targeting a key area that blighted so many small businesses before the pandemic and became even more critical during it – invoicing. Its own research found that, during the first national lockdown, 40 per cent of SMEs had more than £10,000 in outstanding invoices, which clearly impeded their ability to survive, let alone prosper.
So, it launched IwocaPay, which blends payments and finance to deliver the UK’s first invoice checkout solution built for SMEs. Offering a pay now or pay later option on every invoice it makes it easier for them to pay on their terms. Lara Gilman, co-lead at Iwoca, explains its genesis: “One of our services is the Flexi-Loan, which allows people to access cash flow instantly and easily. But this led to the learnings about why smaller businesses actually needed this facility – and the answer was their uncertainty around invoices. They either needed money to pay invoices, or to cover the gap for when they themselves needed their own invoices paid. We saw that we could make financing more accessible at the point where it was genuinely needed.”
One side of the solution addresses how an SME might pay a supplier. Iwoca customers are offered a 90-day flexible option that allows them to spread the cost of bills, while their supplier still gets paid on presentation of the invoice – in effect, a pay-later function. This BNPL tool is part of the trend already established in consumer retail and now beginning to gain momentum in the B2B sphere. The second offering also leverages BNPL, but this time it addresses the eternal issue that SMEs face, which is getting paid in good time. IwocaPay gives its customers the facility to offer their clients an option to pay now or spread the invoice over three instalments for a fee. Either way, the SME gets paid the full amount on time, every time. There’s another issue it sets out to address, which goes to the heart of the payments revolution.
“Right now, 80 per cent of B2B businesses rely on bank transfers to get invoices paid,” says Gilman. “And the problem with bank transfers is they’re not that easy for your buyer; it’s one more reason that an invoice doesn’t get paid. In fact, we know that your invoice will get paid twice as fast if it has an online payment option. So, we also have a Pay Now solution. Together, these tools bring the best of payments and financing into the invoice checkout experience, which means we can help businesses get their invoices paid faster.
“We believe this will have a huge impact on the economy,” she adds, “because unpaid invoices lead to bigger problems around late payments, around time lost, around inefficiency. Bringing a better payment solution to the invoice also helps to de-risk some of the cashflow issues around getting paid. We think we can have a meaningful impact on both small businesses directly and the economy as a whole.”
Freeing up payments
IwocaPay is contributing to a much-needed revolution in invoice payments. Historically, the only option, other than bank transfer,
was to use cards, which has significant, well-established drawbacks – mainly cost. With invoices of between £10,000 and £15,000, SMEs will typically be charged somewhere in the region of one to three per cent just to be paid.
But open banking allows IwocaPay to provide a two-click solution that lets customers pay instantly, without sellers having to foot big card fees. Gilman says: “Cards were an incredible invention 40 years ago, but their business models were built off a much higher cost. “We don’t think you should have to pay just to move money. We live in a world where you
don’t pay for every email or text message you send. Money should move freely in the system, too. With the UK’s Faster Payments, with open banking, we don’t see this as something we should be charging for.”
By the very nature of invoice payment terms, SMEs are basically taking on the credit risk; if a customer runs into liquidity problems, it has a knock-on effect for the seller. IwocaPay is their cash cushion. “One of the things Iwoca is really great at is understanding small businesses,” says Gilman. “The value we bring to IwocaPay is really around taking on the credit risk, taking on the collections risk, allowing SME customers to have an option to spread the cost of their invoices. That’s our value, and so that’s where a seller will pay a fee, to be able to use that pay-later product.”
Last month, Oliver Prill, CEO of UK business financial platform Tide, railed against the ‘slow uptake of open banking’, which facilitates innovations like IwocaPay. This followed a report from the outgoing Open Banking Implementation Entity (OBIE), which showed that only three million UK customers and businesses were using open banking-enabled products at the start of 2021. Prill said that meant missed opportunities for both customers and companies that might have created more new products and services had financial institutions not ‘dragged their feet’ over giving challengers more access to data.
Meanwhile, the Financial Conduct Authority has made efforts to support fintechs experimenting with everything from business models to user experience. Gilman remains optimistic.
“We have a whole new toolkit for how fintech and payments might evolve over the next 10-20 years,” she says. “A lot of the groundwork for that has already been laid – exciting transformations are set to happen. I think we will become much more of a digital society overall, payments being a core part of that. In terms of SMEs, that’s going to be really helpful, because they are, historically, a little bit slower than consumers, in terms of digitisation, especially with other enabling technologies in this space, such as the accounting platform, Xero. Most of the UK’s 5.5 million small business owners spend more time than they need to ticking boxes and filling out forms. We want small business owners to spend less time on paperwork and more time running their businesses.”
Xero’s integration of IwocaPay into its platform could transform the way many SMEs now operate, and is emblematic of how nimble tech providers can be.
“We are the first pay-later payment proposition in Xero’s ecosystem,” says Gilman. “Xero really looks at the world in a similar way to us. We both ask ourselves ‘how can we make these services more available and easier to use for small businesses, so that they can spend more time on their businesses?’ That ethos has really laid a great foundation, which we will continue to develop. I’m enthusiastic about identifying more products and services where we can work together.”
Events of the past year can and should trigger a step-change for small businesses to become more efficient, productive and resilient, says Gilman. “The most obvious of those changes is making payment terms fairer between suppliers and their customers. UK small businesses need a level ‘paying’ field and we’re here
to help them get it.”