30% of SMEs expect to see customers taking longer to settle their bills for goods and services in the coming months, says Aldermore, the new British bank.

Aldermore explains that with cash as the life-blood of any business delays in receiving payments will lead to more businesses failing.

Aldermore says that late payment by customers who are either struggling to pay bills or exerting their buying power to delay payment and improve their own cash flow is particularly damaging to SMEs because each individual bill is likely to account for a larger proportion of their revenues.

Many SMEs suffered when big businesses responded to the onset of the recession by extending the deadline within which they committed to paying their suppliers from 30 to 90 days.

Poor cash flow is a major cause of business failure, and a survey of SMEs by Aldermore reveals that some SMEs are being forced to take steps to prevent their cash flow situation worsening. 66% of SMEs said they had already challenged the payment terms proposed by their customers and 45% claim to have rejected work because of payment terms offered. 

Additionally, 43% of SMEs responding to Aldermore's survey claim they have already threatened to charge their customers interest for the breach of existing payment terms.

Tony Smedley, Regional Managing Director, Invoice Finance at Aldermore in the Midlands, said: "Almost half of SMEs have been forced to threaten to penalise customers for late payments. The fact that they are prepared to risk souring a valuable relationship underlines what a serious issue this is for businesses facing their own financial struggles and lack of access to credit.

"Getting big customers to pay their bills on time is a perennial problem for SMEs but they fix that problem by using invoice finance to free up all that cash that is tied up in unpaid bills."

Invoice finance providers will buy or 'advance' the value of a business' outstanding sales ledger for a fee, often within 24 hours, rather than waiting 30, 60, 90 days or longer for payment on a product they have already delivered. The Asset Based Finance Association's figures show that in the year to the end of December 2010 the value of outstanding invoice finance extended to businesses by its members increased by 9% to £12.6 billion (up from £11.6 billion at the end December 2009).

Aldermore warns that the situation may worsen as government cuts take hold. Tony Smedley adds: "Traditionally, holding a contract with a local council or other public sector body has been a major bonus for SMEs, because the public sector is a prompt and reliable bill payer.

"However, while central government continues to be an excellent customer, and is now targeting a five day turnaround on bills, we are starting to hear concerns raised by some industry commentators about local government and other public sector bodies becoming slower to pay.

"With cuts taking hold, SMEs may find public sector customers becoming more hard-nosed about extending credit with their suppliers for as long as possible.

"However, if you have a sensible invoice finance programme in place then that will protect you from delayed payments from public sector clients and allow your business to focus on its core activities rather than just chasing debts."