Many businesses with the potential to grow are starting to see a pick-up in new enquiries, but recovery can be a precarious time. These businesses may have an increasing order book, but whether they have sufficient working capital to meet those orders is another issue.
Lending figures for the last quarter suggest businesses continue to shy away from traditional forms of lending. The use of invoice finance is surging according to the Asset Based Finance Association (ABFA), the membership organisation for providers of invoice and other forms of asset-based finance. For the third quarter of 2013, total sales from businesses supported by asset-based finance were over £71 billion, an increase of 14% on the third quarter of 2012. ABFA members advanced £17.4 billion to clients over Q3 2013. In the same period, net lending to SMEs contracted by £1.4 billion.
Filling up the order book
Kate Sharp, Chief Executive of ABFA, believes that an increase in orders is often what prompts businesses to approach their bank or finance partner for this form of funding. “Firms get the funding upfront to fulfil orders as soon as the invoice is received, rather than having to wait weeks or even months for settlement. This means that a company can concentrate on keeping clients happy and producing the goods or services to the best possible standard, without having to worry about funds to pay suppliers or staff,” she says.
Kate believes one reason for the popularity of invoice finance is that securing funding does not rely on information that is often out of date. “An invoice financier will make a funding decision based on their understanding of the client business and the underlying strength of its assets,” she explains. “This will often mean that greater levels of funding could be unlocked than might be the case with more ‘traditional’ types of finance.”
A fast-growth solution
Mike Sissons, Director of Client Management at Santander Invoice Finance, says invoice finance is particularly suited to growth businesses. “What we find in a recession is that invoice finance starts to get busier,” he says. “Companies sometimes don’t want to use traditional lending resources and invoice finance suits a number of high-growth businesses looking for flexible working capital. We set a limit but the facility is designed to grow with the business.”
However, the usefulness of invoice finance isn’t limited to recessions. “Industry statistics suggest that four years is the average life-cycle of invoice finance clients,” says Mike. “So companies have access to the working capital they need to grow. They can start to generate profit and then, in essence, become self-funding.”
Critics have labelled invoice finance as overly costly. However, newer internet-based providers have helped to address this issue. Criticism has also been levelled at the rigidity of the lending structure. In the past, businesses that entered into invoice finance arrangements received funds against the whole of their debtor book, but new providers have introduced greater flexibility into this funding niche.
“Firms get the funding up front to fulfil orders as soon as the invoice is received, rather than having to wait weeks or even months for settlement.” Kate Sharp, Chief Executive of ABFA
Selective invoice finance providers such as Platform Black and MarketInvoice enable businesses to auction single invoices to a collective or competing group of investors. Louise Beaumont, co-founder of Platform Black, believes this offers SMEs a transparent means of accessing low-cost invoice finance. “This market-based approach can prove a cost-effective way for SMEs to access finance, as investors compete to drive down the cost of finance for the business selling their invoices,” she says.
“An SME can choose which invoices it puts up for auction,” she says. “The only requirement for an invoice to be accepted onto the exchange – once the SME has been credit-checked – is for supporting documentation to show that the goods or services have been provided to the end debtor.”
Meeting business needs
According to Anil Stocker, co-founder of MarketInvoice, 95% of SMEs in the UK have never raised funding against their invoices largely because the traditional invoice finance product does not suit their needs. “Most SMEs don’t want or need to sell all their invoices through a bank, rather they need a solution which is more flexible, one which they control in terms of when and how much they use it,” he says.
The single invoice auction approach arguably makes invoice finance viable for a wider range of businesses. It certainly helps them with the late payment issues that have dogged UK companies over the past few years. “Large corporates extending their payment terms to smaller suppliers is a serious issue holding back ambitious businesses in the UK,” says Anil.
Benefits for banks
Invoice finance can also be useful for banks, as it brings additional insight into how a business is doing and helps to cement the relationship between the bank and the customer. According to Mike Sissons, “The primary aspect of invoice finance is that it helps us look after the client, but it also helps us look after the capital in the business,” he says. “Clients like the face-to-face contact.”
All forms of funding need careful consideration, particularly newer models. Clive Lewis, Head of Enterprise at ICAEW, points out that as yet the online finance sector is not regulated, but that the Financial Conduct Authority will take over its regulation in April. From the point of view of a business seeking finance, relying on them as a single source is probably unwise, as it would leave few options were the auction to fail. “Always have a fall-back for raising finance elsewhere,” he says.
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