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The Bank of England’s Credit Conditions Survey for Q4 2012 showed trends in lending for the businesses in the UK. While the Funding for Lending Scheme was crucial to increased credit availability for the corporate sector, demand from SMEs was still subdued in the same quarter. The growth area was from SMEs seeking alternative forms of financing for their businesses.

Ask on the ground, and the opinion of small businesses is that current lending policies in place do not benefit the enterprises most in need of lending. A lot of media reports say that funding is available for SMEs, yet somehow the banks are not getting the money in their hands.

This leaves many small and medium-sized businesses looking elsewhere for funding that will support their growth. One popular source is invoice financing, which not only supports SMEs, but it also provides flexible financing terms that are not always available from other lending schemes.

Alternative Sources of Financing

Basically, alternative sources of financing are available outside the conventional realm of high street banks. Even so, many SMEs are unaware that this resource is at their disposal for a multiplicity of business needs. c

Some businesses form mutual support groups that are known as mutual guarantee societies and business credit unions. With a credit union, SMEs can access lower-than-market rates for financing to member businesses that share a philosophy. Members can provide guarantees for other members’ activities.

Another example of an alternative finance source is quasi-commercial finance. These include social banks that will only lend to businesses that have clear environmental and social objectives.

In all, there are a variety of lending sources for SMEs. Some might work for a particular business and some might not work so well. One thing that is clear is the use of invoicing is consistent throughout business practices, which makes invoice financing a viable option for many different industries.

Anyone who runs a business-to business operation raises invoices from providing services or products. Having access to working capital can reduce the wait time for customers to pay. Bad debts have repercussions and SMEs want to avoid this dilemma as much as possible. Tapping into alternative financing can help them achieve this reasonable goal.

Invoice Financing

In the opinion of many SMEs, government support has fallen short of what they need from the most important element – funding. Businesses that require funding and have sought financial help from traditional channels have not been able to secure the requisite funds that will help to drive their companies forward. Many have also not been able to secure needed funding when facing financial ruin.

As a result, there is a funding gap that alternative finance providers have filled by offering products such as invoice financing. The amount of money available through these services is increasing for SMEs. The first part of 2013 has seen a spate of new clients for this growing finance industry. Projections are that this trend will continue to spread throughout the UK region.

Cash flow is one of the biggest challenges for SMEs that have to deal with late payments from customers, particularly from big businesses. Not only do late invoice payments restrict the amount of capital SMEs need to meet their own payment deadlines, but these also restrict the ability to take advantage of growth opportunities. This can leave SMEs struggling to reach the next level and ultimately hurts the economy.

In many cases, this has called for bigger UK businesses to face up to their responsibilities by supporting SMEs with timely payments. But of course, invoices are rarely paid on time, which means the need for invoice financing remains.

Invoice financing allows SMEs to free up their cash flow from existing funds tied up in delayed – or delinquent – invoice payments. It works for SMEs on the following lines: • When an invoice is issued by a SME, the invoice finance provider releases an agreed percentage of the invoice value, often with 24 hours. • Once the customer pays the invoice in full, the remaining value of the invoice is released to the SME.

A key benefit is that SMEs can rely on a steady flow of cash through invoice financing without taking on more debt. SMEs typically know when they can expect to receive funds, which enables them to plan to meet their payment deadlines. They can also plan for future business building.

At first glance, invoice financing can seem a little confusing for businesses unfamiliar with the process. To simplify invoice financing, it can be broken down into two distinct product forms: factoring and discounting. Both of these funding solutions can be used by SMEs involved in domestic and international trade.

Factoring – Most customers can take 60 or 90 days to pay an invoice. This means that up to a quarter of annual turnover can get locked away in debts on the sales ledger that remain unpaid. That is a significant amount of cash that many SMEs would rather have circulating in their business.

Factoring is a way to release that substantial amount of money in less time than 60 days. At the same time, SMEs take over credit control activities and cut operating costs. SMEs can use factoring at all stages of the lifecycle. This includes the start-up phase where some new businesses find it challenging to secure funds from traditional high street banks.

Discounting – Longer established SMEs may want to release the cash sitting in unpaid sales. Invoice discounting is a flexible solution to do just that. The invoice discounting lender will chase outstanding invoices on behalf of the SME.

Therefore, SMEs can operate under this type of financing through an agreement confidentially, which means customers are unaware that payments are being collected by a different entity. This also frees up time for day to day operations that was formerly used to chasing clients for invoice payment.

Advantages of Invoice Financing and Discounting

The management of cash often determines success in business. SMEs that maintain a healthy cash flow are able to meet their payment deadlines and grow their businesses when the time is right. What is more common in the business realm is delayed invoice payments that can delay progress for SMEs. Many businesses in every industry, irrespective of their turnover bracket, have to deal with this challenge.

Regular impact from this struggle of meeting demands from suppliers, HMRC and payroll leaves SMEs looking for ways to remain open. No business wants to receive a reminder letter from HMRC about a tax bill. Furthermore, no business can expect to keep its doors open if it cannot pay staff.

Tapping into the large amount of debt owed by customers through invoice financing brings many advantages that can solve these challenges. Use of the sales ledger is a valuable source of working capital for SMEs. The point between making a sale and receiving payment is shortened by invoice financing.

  • More time to manage their business since the invoice financer looks after the sales ledger
  • Invoice financier will also credit check potential customers to help SMEs trade with more customers who pay on time

Invoice discounting offers the following advantages for SMEs:

  • Confidential arrangements to keep customers from finding out SMEs are borrowing against invoices
  • Maintain closer relationships with customers

How Invoice Factoring Works for SMEs

Whether the need is to have more cash flow for business expansion or working capital for a new acquisition, factoring can work for SMEs. Many services are tailored to individual business needs even for multiple enterprises within the same industry.

SMEs can have immediate cash flow for the growth of their businesses with more working capital. Cash flow concerns are resolved because the turnaround time from enquiry to payout increases.

When SMEs select an invoice financing provider, they should look for certain features that will help their business. Partnerships with providers that not only care about the survival of SMEs in Britain, but also understand the industry is crucial to success. Finance providers should be responsive and offer tailored facilities that meet business objectives.

Making Invoice Financing Work

Knowing how invoice financing works and connecting it to making it work for a business may have two separate connotations. SMEs must make a conscious decision to use the resources that are available to their advantage. This is accomplished by matching the benefits to business objectives. With tailored options from invoice financing lenders, this is easier than most SMEs might think.

Invoices represent a valuable source of cash that can begin to work for – rather than against – SMEs. Cash is released immediately and SMEs can focus on what is most important to building their business.

Furthermore, the cash released is not restricted to specific purposes. SMEs can use the funds for anything that is needed for the businesses. Whether it is for restructuring, expansion or simply to meet day to day operation expenses, invoice financing offers the working capital and time SMEs need to make business happen.