By Simon Carter, Director and Founder, Touch Financial
There is no doubt that small businesses are being declined finance; we know this from surveys and various case studies where businesses have eventually sought the help of a broker having been denied help from their banks, and where no ‘alternatives’ have been suggested.
It has been argued that banks are deliberately ‘disinclined’ to steer customers towards other lenders, but I suspect the problem is bigger than that. I think it is because many advisers within the banks are simply not experienced enough or suitably equipped with sufficient knowledge of what alternatives are available – including alternatives within their own banking organisation – to be able to give meaningful advice.
And the challenge does not end with the banks. Typically, a small business having been declined finance will seek help from his accountant or other intermediary. The accountant, who is similarly unfamiliar with alternative lending, will refer his enquiry back to the banks, and so the loop of negativity is closed. The customer rarely, if ever, is steered to the open market where solutions can be proposed from both the ‘banked’ and ‘non-banked’ providers, giving the cash-strapped business a genuine ‘choice’ as regards what is available beyond an overdraft.
This premise is born out by the facts: the average value of ‘traditional’ forms of funding (bank loans, overdrafts etc.) supplied to businesses fell by 5% over the last year. Net traditional funding to businesses is now down by almost £100 billion since 2009/10, falling 19% from £485 billion to £391 billion, according to statistics published by the Asset Based Finance Association (ABFA).
Alternative lending, and asset-based lending in particular, such as Invoice Finance (where the principal ‘asset’ is the sales ledger), is often a far better working capital solution for SME’s looking to take on new contracts and grow; the facility grows as the turnover of the business grows, as opposed to a facility growing as the result of a personal guarantee or secured against an historic trading performance, often with disastrous results.
One of the main reasons a business will seek an alternative source of finance is to mitigate their suppliers paying them late. Research from Bacs in 2014 suggested that the late payment debt burden shouldered by UK businesses reached £46.1 billion, of which the vast majority (£39.4 billion) is owed to SMEs. 60% of UK SMEs are experiencing late payments, with the average SME owed more than £38,000. One in four said that if the amount they are owed grew to more than £50,000 it would be enough to send them into bankruptcy.
Mars hit the headlines last year for extending its payment terms from 60 to 120 days, but couching the extension within a new scheme that offers suppliers a chance to be paid within ten days if they accept a lower value for their invoice.
More recently still, reports appeared of 120-day payment terms imposed by the drinks firm AB InBev on its UK suppliers and the funding ‘gap’ that this creates while waiting to be paid while the company still has to pay out in wages, taxes and other overheads.
When a company with a good order book and a solid financial track record is not able to get finance to meet new business opportunities, then it can be all seem very perplexing. This is especially true for companies in sectors where there are weekly wage bills to pay such as recruitment and construction.
Invoice finance, as one of the principal methods of asset based finance, enables businesses to receive up to 80% of the invoice value immediately, and the balance once the amount is settled. That way they can keep the cash flowing through their businesses, and not be held to ransom by their larger customers. Put simply, the more invoices that are generated, the more cash becomes available to the business to invest, thus creating a virtuous circle.
The cost involved in invoice financing is a percentage of the amount being loaned, and works equally well if the money is needed quickly or if the business is looking to fulfil new orders and grow. A company can receive as much as four times the cash it would from a bank loan or an overdraft facility…and without red tape. Which all rather begs the question: why is invoice finance still being ignored as an essential part of the funding environment?
Invoice Finance is just one of the tools available to help businesses to grow. For too long it has been seen by banks (and indeed intermediaries) as finance of the last resort, primarily because it has been misunderstood. It is time to think again.