David Starves While Goliath Hoards the Cash

I had a distress call first thing yesterday morning. It came from a wonderful business adviser I know who cares passionately about the clients she works with. This one though, had her foxed.

A small business with 8 employees and a full order book had run out of working capital. The huge household name business they supplied owes the small 8-person business money. That’s not unusual.

Nor is there anything unusual about the fact the small business asked their bank to extend their overdraft to keep them going until the money owed came in. And again, it’s not unusual that the bank’s response was ‘No’. No questions asked, no facts checked, no reasons given. Just a straight ‘No’.

To go into all the details here would take too long and given that I worked with the Department for Business and Trade for 4 years until June 2025 on the payment’s issues, I could go on for far too long. However, there are some points worth considering.

The bank should have referred the small business to other possible sources of funding through the Bank Referral System (BRS). It didn’t. The adviser and I talked around other possibilities.

9 out of 10 businesses that apply for funding get rejected:

• Over 90% of small and medium sized businesses are not finance-reafy. Only 1–5% of applications are approved regardless of how many lenders they are referred to.
•  Only 9 in 100 businesses meet the basic criteria set by funders and of those 9, more than a third are approved, so the Scheme works when businesses are ready.
• Two thirds of the businesses that have their funding applications rejected could improve their finance-readiness quickly if they had the right advice and guidance for their businesses.

Part of the problem is that small businesses aren’t told why they aren’t being funded and don’t know where to find the right support to fix the problem. And once you’ve been rejected you feel a failure and that you’re being judged so you are more reticent to try again.

The main reasons applications get rejected:

• Liquidity and recent performance (46%)
• Credit quality (27%)
• Compliance and trading history (13%)
• Behavioural risk (7%)

Many small businesses have no idea what affects funding decisions. In the case of the adviser’s small supplier client, we think one of the reasons they were refused an extended overdraft by their back was that they don’t have liquidity because there’s a large amount of money owed from a customer. The immediate risk is the customer doesn’t pay and the bank’s money won’t be repaid but there’s also a risk to the business of not managing payments, cashflow and trade credit. An adviser might have suggested that the small supplier held back cash and didn’t pay their own suppliers until they got money in from their big customer. However, making sure the suppliers further down the supply chain can and will keep on supplying you in future when you need their goods or services makes sense. If you don’t, they may be the ones going bust or selling their stuff to your competitors in future.

It’s also possible that the big household name customer is holding onto cash because of the economic climate and using the 8-person business as a bank. It’s possible they have rubbish payments processes and payments are overdue. It’s possible that the contract they had the 8-person supplier sign says that it will take 120 days before they will be paid and the small supplier either didn’t realise or thought they could operate until payment arrived only to find that increasing business costs, NICs, wages and bills have used up their reserves.

Whatever the reason the 8-person supplier needs cash, the fact that they do need cash can make it more difficult to get the funding they need.

We need better systems. Large customers need to understand their smaller suppliers and get to know them better. They need to nurture them or risk losing they products, services, experience and knowledge as well as their expertise. They need to agree with them the terms of their contracts and make sure clauses on how they will work together, including payment terms, are fair. Once those contracts terms are agreed they need to stick to them. There also needs to be a person for the supplier to talk to if all goes wrong, someone who can appreciate the value smaller suppliers bring and can help them over a difficult patch, without having to pay additional costs of borrowing in the first place. That kind of partnering and stewardship is good for all concerned and wins hands down.

Our small business is off to appeal to their big household name customer’s better nature. I have everything crossed. We need all the expertise our small businesses contribute the economy, to wider society and the communities they are rooted in.

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