Hokodo's 2023 predictions: Digital trade credit will release much-needed liquidity

29% of SMEs already struggle with cash flow. But as we head into 2023, it’s about to get even worse. Soaring interest rates, energy costs, and inflation will make a heavy dent in profitability, while razor-thin margins will likely get even slimmer. Somehow, B2B firms will need to remain competitive against a backdrop of increasingly late payments and rolling recessions. To my mind, there is only one way to do that – by digitising the ancient trade credit process.

I believe we’ll start to see the first real bursts of this digital uprising in 2023. The economic ground is ripe for change, and businesses are hungry for financial democracy. As we welcome the new year, let’s look ahead to a new world of opportunities with digital trade credit.

Over the next decade, I predict that digital trade credit will take the B2B world by storm, releasing much-needed liquidity. It will provide an invaluable lifeline to the 400 million SMEs worldwide, not to mention the billions of employees who depend on their success.

1 | 2023 will squeeze cash flow

As Bloomberg puts it, a “global slump” is on the way. Rising energy costs and high interest rates, combined with lower consumer spending, will take their toll on businesses. Sadly, this means increasing numbers are expected to go bankrupt over the next year, according to Trading Economics’ forecast.

To survive, businesses will need to look for efficiencies without compromising on their product or service. An obvious solution is to close the trade credit gap. As of October 2022, UK SMEs were forced to wait 54.1 days to receive their money, a five-year high. The average SME is waiting for invoice payments of £147,000.

If B2Bs can get the money they are owed faster, hundreds of thousands could avoid shutting down.

2 | Outdated trade credit systems will hurt SMEs

The negative impact of waiting around for invoices to get paid cannot be overstated. Today, 39% of SME owners say their mental well-being has suffered; 34% say that unpaid invoices give them sleepless nights; a quarter have been forced to cancel holidays because of money owed to their business; and 16% receive late payment charges from their bills. Business owners are reaching breaking point with the current system, and unless something changes in 2023, things are only likely to get worse.

The domino effect across supply chains is traumatic too. As suppliers wait for months to pay their own suppliers, the cycle drags on. In 2023, firms will need to break this downward spiral.

Unless businesses look for new ways to get their cash flowing, they’ll be hit by a barrage of obstacles. Given the exploding interest rates, the answer will not come from traditional lenders.

3 | Interest-free B2B lending will soar in 2023

Interest rates in 2023 are anticipated to continue skyrocketing. By July 2023, the Bank of England is predicted to crank the base rate up to a whopping 4.8%. This is not good news for the 64% of UK SMEs who need to borrow money next year. 

Frustratingly, over half of these companies are forced to borrow money at these rates while they wait for their own invoices to clear. The situation has become so dire that 43% of UK SMEs are now taking the risky decision to re-negotiate their payment terms with suppliers. They’re looking for shorter payment terms and increasing prices. This reduces competitiveness and puts even more pressure on struggling buyers – something they surely do not appreciate.

But there is another way. Interest-free lending – such as digital trade credit – means that SMEs can lock in the price and defer payment without the high interest rates.

4 | B2B firms will discover the power of digital trade credit

Adding a digital trade credit solution to an online checkout benefits buyers and sellers alike. Buyers benefit from generous payment terms while merchants can choose when they get paid. What’s more, the merchant takes on none of the risk, which instead falls entirely onto the third-party lender. It’s a simple and effective way to dramatically boost cash flow. I am certain digital trade credit will continue to spread in 2023 as it has over the past year.

The reason I am so sure of this is that the most successful companies will be those that have the cash flow to scale up. Having access to liquidity boosts margins by a significant 10-15%. As these firms grow, inevitably, so will digital trade credit.

But that’s not all. When businesses have the liquidity and freedom to invest, they can compound their returns exponentially. 50% of UK SMEs plan to borrow money over the next twelve months so that they can expand operation. If they can do this with the money they are already owed, they avoid going into debt and improve their margins.

Moreover, if they use credit themselves to purchase the most efficient technology and materials, they can boost revenue even more. And that’s before we factor in the impact of less stress and more restful nights. Digital trade credit increases the potential for SMEs to grow. By contrast, those that don’t adopt it will fall behind and struggle.

5 | Digital trade credit will spread to new sectors

B2B digital lending is striding ahead. Over the next few years, business lending built seamlessly into the e-commerce platform (known as embedded lending) will grow five-fold in the US. A big proportion of this will be digital trade credit.

Based on our own observations and findings at Hokodo, I predict that the types of businesses offering embedded lending solutions will evolve too. Today, we see freight companies jumping aboard the bandwagon. Because of their long payment terms and ongoing costs, it was an obvious fit. 

As the recession clamps down hard on economies, I predict that local businesses will be looking for ways to manage cash flow. The kind of brick-and-mortar stores that provide food, beverages, soft furnishings, or agricultural goods will be seeking more flexible terms. Another group that may be keen to explore interest free lending options include freelancers and professional services. Cash-strapped freelance writers and graphic designers may struggle to buy a coffee but have thousands due to them in 30, 60 or 90 days. These are exactly the kinds of business owners who may benefit from digital trade credit.

Liquidity will be the key to success in 2023

Having instant access to payments and materials gives B2Bs the freedom to move quickly. They can pivot, scale, and meet customer demands without the usual delays and restraints. As we enter a recession and a new year, there is a unique opportunity for agile and liquid businesses to outshine competitors. The key to providing this much-needed liquidity is digital trade credit.

Discover predictions from other members of the Hokodo team in our new ebook.