Britain’s SMEs are hugely important to the country’s economy, with recent figures indicating that small businesses were responsible for almost 50 per cent of UK turnover last year, and employed 60 per cent of private sector employees.
But it’s no secret that access to finance and business growth are intrinsically linked and since the onset of the recession in 2008, SMEs have been hit hardest financially, caught between high street banks refusing to lend and larger clients forcing longer payment terms. Last month, Vince Cable, the UK business secretary said, “small and medium sized businesses are still telling me that access to finance is their number one problem, preventing them from investing and growing.”
One positive aspect of these thorny economic times, however, is that they have encouraged innovation and diversity in the lending market, with the emergence of more independent British banks, and alternatives like crowd funding and peer-to-peer lending on the rise.
Unlocking Cash Capital
Receiving payment from clients on time can become a major issue for small businesses. Many SMEs simply don’t have the resources to chase overdue payment, and as a result, find themselves short of cash when wages are due at the end of the month.
There are now just over 42,500 small businesses using asset-based finance in the UK, according to research by ABFA – a figure which is expected to grow to over 45,000 over the coming year. The most popular form of asset finance is invoice financing, whereby banks lend money against unpaid invoices.
There are generally two routes for invoice financing:
- Invoice Factoring: the lender effectively ‘buys’ the debt, taking over sales ledger management, and collecting debts on your behalf.
- Invoice Discounting: an agreed percentage of funds are made immediately available against unpaid invoices. In this instance, you retain responsibility for your chasing payment, which is sometimes preferable for confidentiality purposes.
One of the major benefits of invoice financing is that it frees small businesses from being at the mercy of their customers. Cash flow is one of the most regularly cited reasons for business failure and 24% of businesses report that they have experienced cash flow issues as a direct result of late payment.
SMEs will always need access to affordable finance to prosper. The economic circumstances mean that it may be difficult to secure finance the traditional way, but alternative funding providers give SMEs options with much needed flexibility, low cost, and speed.