Money (6)

While access to bank overdrafts may be dwindling, a new generation of innovative financiers is helping SMEs to thrive.

Small and medium-sized businesses (SMEs) are under mounting pressure to perform in an environment where finance availability – including the previously dependable high street overdraft – is in decline. And with the perennial issue of late payments continuing to plague the sector and create cash flow gaps, many SMEs are understandably concerned about the future of their businesses. Steven Renwick, CEO and founder of Satago, examines how alternative methods, such as invoice financing – mixed with online technology – can help to ease the late payment headache.

Comprising 99.3% of all private businesses and with a combined annual turnover of £1.8 trillion, SMEs are the lifeblood of the UK economy. Yet, while they are often recognised as the country’s backbone, the truth is that SMEs are increasingly being underserved by the UK’s banks.

Following the introduction of capital-adequacy requirements in the wake of the 2008 financial crisis, traditional SME financing has been rapidly declining as banks retreat to safer blue chip funding. SME lending via overdraft facilities has declined by £8.5 billion in the past four years, leaving many business owners without a dependable safety net for their short-term cash-flow needs – particularly when it comes to late payments, one of the most common causes of SME insolvency. Indeed, over half of UK SMEs are currently owed money from late paying clients; a problem so severe that 67% of businesses in a recent survey fear late payments will force them to close.
As a result, increased strain is being placed on small businesses to optimise their cash flow and spend significant time chasing late payments. Currently, SMEs spend an average of 130 hours per year chasing overdue invoices – detracting valuable effort and resources from core functions.

While tardy payments are certainly nothing new, the fact that liquidity from the banking community is increasingly in short supply means that SMEs are being made to feel stuck between a rock and a hard place. Indeed, with the ever-elusive overdraft seeming unlikely to make a resurgence in the near or even medium-term, where does that leave the hardworking entrepreneur who must manage cash and strive to grow their business in increasingly challenging economic circumstances?

The new kids on the block

Thankfully, alternative financiers – often equipped with cutting-edge technological innovations – are plugging the market gap created by the retreat of traditional providers.

Indeed, the growing alternative financing sector is restoring business owners’ cash flow confidence and allowing companies the necessary funding to reach their full potential.

As a result, growth of the UK’s alternative finance sector almost doubled between 2014 and 2015 to £3.2 billion, helping to bridge the SME lending gap and providing valuable support to the sector. Accounting for 12% of the market’s lending to SMEs, many of these nimble providers are offering not only an alternative to the overdraft, but an enhanced means of funding.

One method – selective invoice financing – is proving particularly popular; immediately releasing money tied up in unpaid invoices and allowing businesses near-instant access to much-needed funds. Selective invoice finance enables businesses to choose which invoices are funded according to their specific cash flow needs – as opposed to more traditional invoice financing, where the entire sales ledger is funded. It is also extremely flexible, growing in tandem with turnover and therefore making it especially valuable to seasonal and expanding businesses.

Invoice finance companies are not only restoring working capital to the SME’s account, but are also harnessing financial technology “fintech” capabilities to help enhance their offerings and support SME growth. For instance, it is possible for some invoice financiers to leverage real-time risk-assessment data to gain a greater understanding of the suitability of certain companies wanting to be financed – meaning businesses that may have been denied funding elsewhere could still be approved. Furthermore, some providers are funding invoices from the point at which they are raised, until the due date and even beyond.

Compared to previous methods, which involved financing at the point the invoice is raised initially, this revised approach can help to ensure that the maximum amount of the invoice’s value remains in the SME’s pocket – keeping their financing costs as low as possible.

With access to overdrafts retrenching, small businesses are increasingly looking for cost-effective and flexible means of supporting their cash flow needs. In this new environment, the rise of invoice finance is testament to its ability to give entrepreneurs the freedom to access working capital and to devote less time to chasing overdue debtors, and more time to achieving a core objective: to grow their business.