• Antony Smith, Managing Director at Company Dept


• 14.06.2018 07:30 am
undisclosed

Many small-and-medium-sized enterprises (SMEs) have enough trouble maintaining a healthy level of cash-flow as it is, so the last thing they need is for their bank to suffer an IT failure that puts their accounts out of action.

In the 24/7 banking climate we now have, it’s not surprising that transitioning thousands of traditional bank accounts to newer, faster systems may lead to the occasional system failure. One would hope that by running a parallel disaster recovery system, getting up and running would be a smooth process and be possible within a 48-hour window. But sadly, as evidenced by the recent chaos created by the Lloyds TSB system failure, that’s not always the case, and as well as personal account holders, it’s businesses that suffer.  

Recent research from Barclaycard has found that cash-flow concerns keep 63 percent of small business bosses awake at night, while a third admit that insufficient working capital has stunted their growth plans. With so many businesses already struggling to control the level of cash coming in and going out of the business, having such a long period when accounts cannot be accessed or payments made and received can drive a business to the brink of insolvency.

As the driving force behind the British economy, there is increasing government scrutiny on the treatment of SMEs. Simply offering compensation after the event may not be enough to demonstrate support of the business community. Many businesses may also choose to switch banks a result of a system failure. So what can the financial industry do to support SME customers and help to mitigate the impact of such a potentially damaging event?

1. Communicate with customers

While the bank’s first priority might be to try and reduce reputational damage, failing to communicate the full extent of a systems failure with its customers will only exacerbate the situation. In the recent TSB systems failure, most customers were told it would only be 48 hours until they could access their accounts properly. In reality, some small business owners were unable to access their accounts for up to a month, leaving them unable to pay salaries and manage transactions. In some cases, all direct debits disappeared and businesses ground to a halt.

Although upheaval is inevitable, communicating openly with customers will give businesses the opportunity to plan for the financial challenges they face and take steps to reduce the impact as much as possible.

2. Encourage businesses to communicate with their supply chain

Late payments are the scourge of the UK’s small business economy. According to a recent YouGov survey, one-in-four SMEs have had their financial viability put at risk due to late payments, with 53 percent of those business owners admitting to using their own personal finances to keep their businesses running in the interim.

With late payments such a contentious topic for many SMEs, it’s essential that if a business is aware it will be unable to make a payment on time, it informs its supply chain immediately. Failure to do so could damage relationships that have taken many years to build.

If creditors are not made aware that payments will be late and why, they may decide to begin proceedings to issue a statutory demand or county court judgement (CCJ) against the business. That could cause long-term damage to the business’s credit rating and even lead to compulsory liquidation.   

3. Provide temporary credit streams

While some suppliers may be willing to wait for the banking glitch to be fixed for payments to be made, not everyone will be quite so pragmatic. Utility and broadband providers, landlords, lease providers and other financial institutions are likely to send payment demands and even threaten legal action.

To help keep those creditors at bay, banks could offer emergency temporary overdrafts at favourable terms to help businesses that have been affected make essential payments. That will reduce the risk that those businesses will collapse and allow them to continue to operate as normal. Potentially, it will also reduce the amount of compensation that needs to be paid after the event and help the bank maintain good relationships with its customers.  

Advising SMEs on how to mitigate the impact of technology failures

There are also a number of steps business owners can take to reduce the potential impact of a banking system failure. They can:

• Explore alternative finance methods such as invoice finance which can turn unpaid invoices into quick cash.
• Maintain a cash cushion for unexpected expenses which is kept in a separate account.
• Set up a business overdraft or credit card with an alternative provider.
• Contact suppliers they have issued invoices to and ask for payments to be made into a separate account.

A system failure can cause significant stress for a business owner, but given the right preparation and assistance from the financial institution at fault, there’s no reason why it cannot be managed correctly.