Business leaders and economists have been preaching the ‘green shoots’ of economic recovery of late, as unemployment continues to fall and house prices steadily rise. “The business consolidation period is over,” stated ICAEW’s Simon Alsop at a roundtable discussing growth opportunities recently. Research findings analysed at the same discussion pointed to a core of SMEs dissatisfied with the restrictive nature of traditional bank overdrafts looking to alternative methods such as invoice factoring as a way to sure up cash flow and expand their businesses.
However, businesses are being urged to tread carefully. Managing partner of Liverpool based corporate recovery specialists Begbie’s Traynor John Fairbrother points to the trend of SMEs counting their chickens before they’ve hatched, over-stretching themselves financially in light of an improving economy and simply running out of working capital in the process. Factoring has been seen by many as a reliable way of plugging the funding gap, with lenders usually able to offer up to 90% of the value of the borrower’s invoices, with the loan being paid back upon receipt of payment from that business’ suppliers.
Fairbrother highlights the cash flow problem that exists for manufacturing firms. “When businesses have to commit to the raw material and make the products that are in demand due to rising sales…this results in a negative cash flow situation as payment for the finished goods will be in three or four months’ time.”
“Businesses might want to consider using invoice discounting or factoring as a means of managing cash flow,” he states.
The IMF however is more optimistic, upping their UK growth forecast from 0.9% to 1.4%. “Higher business confidence” was one of the factors that influenced this decision.
Factoring tends to be combined with other methods of invoice finance such as asset based lending, particularly in manufacturing circles where companies can tighten up the security of the loan against non-payment of invoices by borrowing against plants and machinery.
The Chancellor George Osborne has weighed in on the debate, asserting during a talk at a construction site recently that Britain is “turning the corner” and is well on the road to recovery after a long period of stagnation. Encouraging growth in manufacturing has been a core economic policy of this Conservative government
With over half of businesses surveyed by factoring brokerage Cashflow Acceleration stating that they felt they would be more successful given more flexible funding arrangements, the appetite for alternative forms of commercial finance such as factoring would appear to be growing.