Whilst it is now a widely accepted form of finance, lending against the receivables in the business via invoice finance is still often considered ‘alternative’ rather than a mainstream funding solution.
Within the commercial finance broker community, the view is that we need to change this mindset so instead it is viewed as a conventional finance tool for SME businesses.
At Reach Commercial Finance, we categorise our work in two areas – invoice finance and alternative – the latter for us being plant & machinery, property, cashflow lending etc. We see invoice finance is a fundamental solution when addressing a funding challenge. At any point in time, the invoice finance and asset based lending market is advancing over £22 billion to 42,000 UK businesses, supporting clients with a combined turnover of more than £310 billion per annum.
Gary Cain, Director at Reach Commercial Finance looks at types of products available in the market and the benefits to business owners.
Mind the gap
By bridging the gap between the point at which a sale is made and the time when the debtor has made payment (typically 30 – 60 days +), sufficient cashflow can be maintained, allowing the business to grow or fulfil further orders and avoid supply chain restrictions.
Improving cashflow is critical to many businesses and so too is the ability to extend payment terms to customers without being concerned about the negative impact on working capital. There are many funding solutions available to SMEs and financial history or adverse credit can lead to funders declining applications. With invoice finance, a factoring facility can still be delivered on the strength of the debtors and not based on the client’s own financials. The flexibility of this type of product means that as sales increase so does the amount of funding available.
Pay-as-you-go
Flexible use of single invoice or specific debtor finance is a great stepping stone for those SMEs who are uncertain as to the benefits of funding the debtor book, using spot or selective finance.
This creative, flexible solution gives the option to offer single invoices rather that the whole of your turnover. With no long term tie in with a lender, and no minimum fees this is ideal to address an ad-hoc cash need.
Chris Findlow, Head of Partnerships at Marketfinance comments: “Getting funding against specific invoices from a single or handful of debtors on a pay-as-you-go or via subscription lets a business access cash already owed, quickly and simply and gives them the flexibility to manage cashflow as they actually require. This has benefits over full ledger facilities, as you only pay for what you borrow, without being tied into lengthy contracts.
“With uncertainty, flexibility is key, which helps to explain why we have seen such a significant increase in lead volumes over the last 12 months. It’s also important in this day and age to get decisions made quickly. Our systems allow businesses to get approved within 24‐48 hours, giving them the access to cash they need when they need it”.
Jamie Smith, Corporate Manager at Inksmoor Selective Finance also commented “Recently Inksmoor have identified high volumes of companies stripping their whole turnover facilities back and choosing to move on to a Single or Selective Debtor Facility as a route forward. For SMEs that have a single key debtor or multiple debtors that represent a large portion of their total turnover, they can maximise the businesses cash flow by releasing up to 90% cash from these invoices – this is often more cost effective than putting invoices through one of the ‘big four banks’ traditional facilities.”
Single platform
Online portals make using these forms of finance so easy to use. James Chetwood, Business Development Manager from Satago explains how their single platform allows their clients to credit check customers as well as access funding – it can also automate invoice chasing. “While financing invoices is, of course, a great way to boost cashflow, equally important is having robust control over your collections and managing the risk of your debtor book. Our platform allows you to do all three.
“Recently we have been seeing increasing numbers of enquiries from businesses who haven’t used invoice finance before but are experiencing a squeeze on their cashflow for various factors and are unable to access the funding they need from their bank.
“Understandably, those who haven’t used invoice finance before might be a bit tentative to enter into long term agreements so our simple, flexible selective invoice finance product gives the comfort of not being tied-in with full flexibility over a funding arrangement. Even better, if a business decides after a while that it is a tool they would like to use more frequently, then we can transition to a full invoice finance product with cost-effective funding across the entire ledger simply and easily with accounts software auto-reconciliation”
Education
Penny is one of the newest entrants in this space, and Chief Commercial Officer Adam Parker summarises: “Educating the market on the different types of invoice finance will become key over the next 5 years. We’ve already started to see an uplift in the number of clients coming to use Penny’s online, on-demand solution, with the number of applications steadily increasing since July 2020. We expect pay-as-you-go models to be the largest growth area of the invoice finance market. This is due to the flexibility, digital innovation and ’out of the box’ thinking that we and some of our peer lenders are offering customers”.
Build back better
Working within the commercial finance market have tangible experience of the vital benefit invoice finance can have on a business, whether that be the traditional model or new flexible options. Professional advisers and business owners must be encouraged to engage with invoice finance as a working capital solution – this is the job of the broker community. Here to support you we are on hand to offer market insight and up to date market advice to find you or your clients the most appropriate solution. Highlighting the benefits of invoice finance is more important than ever, to help businesses build back better post-covid.