02/07/2015

By Henning Holter, Head of Business Development for Tungsten Bank

Late payments and cash flow problems are once again hitting the headlines with the introduction of the small business conciliation service announced last month. The new business secretary, Sajid Javid hopes the service will provide support to large businesses and their suppliers and encourage a mutual agreement from both sides on the length of payment terms.

Businesses are still finding it difficult to manage their cash flow, with late payments and long terms only making it worse. However, reducing lengthy payment terms is just one way to help smaller businesses. SMEs need access to finance in order to take the pressure off their cash flow constraint regardless of payment terms.

With persistent barriers to traditional routes to finance such as bank lending, alternative forms of funding are becoming more and more prevalent, in part thanks to new technologies. Other working capital solutions such as invoice finance, other asset-based options and peer-to-peer lending are now more accessible as viable means to ease cash flow pressures. April’s ‘Trends in Lending’ report from the Bank of England reinforced this, with the report outlining growth in alternative finance, showing that businesses are increasingly looking beyond the high street banks.

In doing so, they also discover that options like releasing funds from outstanding invoices can offer a financing solution that is distinct from and, crucially, more flexible than traditional bank overdrafts and loans. It enables working capital to be released immediately to meet operating costs, and to allow business owners to focus on processing new orders.

By converting accounts receivables to cash on demand, companies also create a source of funding that grows as the business grows. This helps guard against cash flow challenges created by slow-paying customers, supporting businesses at each stage of their lifecycles.

Alongside this, figures from the Global Commercial Banking Survey state that over half of businesses (51 per cent) have switched or may potentially switch banks within the next 12 months. Clearly it’s more than just high rejection rates that are turning businesses away from banks, with recent research from Ernst & Young citing that nearly one-third of companies have experienced an error or problem with their primary bank.

With this in mind, it’s useful for us to bust the myths that surround alternative forms of funding, to ensure businesses have all the information they need to make an informed decision on finance when perhaps a bank loan isn’t the most appropriate solution for their business.

Firstly it’s important to seek advice and shop around. At first glance alternative finance may appear more expensive, but its suitability and flexibility for your business means it could be more cost-effective.

Secondly, many businesses shy away from alternative finance options because they believe they will be tied into a contract or potentially lose confidentiality of financing vis a vis their customers. With many early payment solutions, you have the choice to be anonymous and therefore customers won’t know if you choose to advance your invoices. As well as this, the business owner has the flexibility to only finance the invoices they choose at a time that suits them, making it a viable option for seasonal businesses as well as regular use.

Matching the appropriate financing solution to your specific requirements will reduce the financial risk and exposure for the business. For example, expensive overdrafts and inflexible loan arrangements to manage cash flow should be replaced by careful cash management and flexible working capital solutions. When using invoice finance facilities you reduce the debt on your books and transfer the risk of non-payment from your customer over to the funder, therefore taking the pressure off your business.

Finally, as most business owners are time poor, lengthy administration or set-up processes can often be seen as a barrier to funding. Many businesses now use the latest technology to provide funding quickly and easily, accessing it online at any time of the day.

With an increasing number of businesses using alternative forms of funding, it won’t be long before alternative finance is no longer the alternative.

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