By Edward Winterton, Commercial Director at Bibby Financial Services.

The fact that the Government is formulating a plan to set up a state-backed small business bank in an attempt to get credit flowing to small and medium enterprises (SMEs) is proof of the current difficulties facing business owners in securing access to finance.

Business leaders have grown frustrated by the failure of recent government-backed funding initiatives and the World Economic Forum highlighted this in their recent Global Competiveness Index, which revealed UK firms feel the most problematic factor when doing business is access to finance.

Project Merlin and the National Loan Guarantee Scheme failed to address declining funding levels and consequently have now been superseded by the newly launched Funding for Lending scheme. Whether this latest initiative will finally get credit flowing down to small and medium-sized businesses is yet to be seen.

Sluggish economic growth and factors such as the fragile state of the eurozone mean the banks have been less inclined to lend money and contributed to the caution felt by small and medium-sized businesses when approaching banks for funding and taking on further debt.

However, with running costs, suppliers and staff salaries still requiring payment and raw materials and new equipment to be purchased, a healthy and ongoing supply of funds is integral to businesses survival and to realise ambitions for sustained growth.

With this in mind, more and more businesses across the UK are broadening their horizons when it comes to reviewing the finance options available to them. The latest figures from industry body the Asset Based Finance Association (ABFA), suggests turnover from companies using invoice finance grew six per cent in the first quarter of 2012.

What is invoice finance?

When running a business, cash is king. Of all the challenges facing small and medium-sized businesses generating cash and keeping it flowing can be one of the toughest. If your cash flow is suffering while you wait for your customers to pay their invoices, it may be appropriate to approach an invoice finance company.

Generally speaking, invoice finance takes two main forms. The first option for many businesses is factoring; a flexible funding and collections facility. Factoring helps to bridge the cash flow gap between raising an invoice and getting paid, giving businesses an immediate cash-injection and then an ongoing supply of working capital against the value of outstanding customer invoices as they are raised. Using a factoring facility, businesses also benefit from the provider’s credit management and collections service, saving them valuable time, as the provider will chase and collect outstanding invoice payments on the firm’s behalf.

The other main option is invoice discounting; a flexible funding-only solution. Unlike factoring, the business maintains control of the sales ledger and continues to collect payments from its customers against outstanding invoices.

What does it cost?

There are two fees involved: The first is for the cost of the finance. This compares favourably with the cost of a typical bank overdraft.

The second is for the service you receive which on average is between 0.5% and 3% of annual turnover but it depends on the number of customers you deal with and the number of invoices you raise. Compare it against the cost of your existing credit control team and the savings you will make.

Never decide on cost alone, consider the quality of the service you receive and ensure you are comparing like for like.

Choosing a suitable provider

There are now in the region of 50 different companies offering invoice finance facilities in the UK, including bank-owned providers, independent companies like Bibby Financial Services and boutique firms which provide services for just one or two niche industries.

Typically, firms are introduced to a providerthrough their bank, a broker, financial adviser or accountant. However, we are also seeing increasing numbers of businesses getting in touch directly with us to discuss whether invoice finance would suit their financial needs. To help you choose a suitable invoice finance company to work with your business you should ask the following questions:

Are they a member of The Asset Based Finance Association (ABFA)?

What percentage of your invoices will be approved by the invoice financier and therefore funded?

Have you met the person will look after your account and do you have access to the decision-makers?

Do you understand how the invoice financier will work with your customers? Will they communicate by phone, mail or both?

Are there any hidden charges?

Through the depths of the last recession we have seen from our 4000-strong UK client base just how important securing funding has been, not only in terms of businesses surviving but also in building for growth. Since 2007 we have been tracking the turnover performance of our UK client base across five key sectors and our latest ‘Business Factors Index’ revealed output during the second quarter of 2012 reached pre-recession levels. Outstripping the performance of the wider small business community, the level of turnover seen by clients in the past quarter, and since the onset of the financial crisis, is testament to the role invoice financecan play in driving business growth.

Many firms like the flexibility offered by invoice finance as it can help them to manage the peaks and troughs most businesses experience, without having to renegotiate a long-term financial arrangement. As a company that has the interests of small and medium sized businesses at heart, Bibby Financial Services will continue to support businesses in the UK with our flexible invoice finance solutions, helping the region’s firms play their part in driving economic recovery towards growth.

Fresh Business Thinking is running a must attend event for business owners, managers & entrepreneurs looking for alternative sources of funding.

The Fresh Business Thinking Guide To Raising Finance is sponsored by Bibby Financial Services. You can book your ticket here for just £95 by using the code 'EarlyBird' at the checkout.