This post has been provided to us by Satago – On Demand Business Finance
The small-and medium-sized (SME) lending market has changed significantly in recent years, with many traditional banks taking a step back and withdrawing liquidity, while alternative lenders are gradually stepping in to fill the funding gap. Indeed, the UK online alternative finance sector grew by 84% to reach £3.2 billion in 2015 (up from £1.74 billion in 2014), and alternative finance now accounts for 12% of the market for lending to small businesses in the UK.
Invoice finance has gained the most attention in this respect, and is a key way in which businesses can access finance to support expansion and fast-growth, and also address a persistent issue renowned for plaguing SMEs from all sectors – late payments. Invoice finance works by immediately releasing money tied up in unpaid invoices (even, in some cases, those that are already overdue), accelerating businesses’ access to cash flow. While traditional invoice finance involves the funding of the entire ledger, in the case of selective invoice finance, businesses can choose which invoices are funded in accordance with their cash flow needs, which helps to ensure as much of the invoice’s value as possible stays in their pockets. This makes cash flow more reliable – therefore greatly aiding cash management – reduces the need for reliance on funding, and keeps costs to a minimum.
With estimations that half of all invoices owed to small companies in the UK are overdue, averaging nearly £21,000, many UK SMEs are being forced to juggle funding gaps, and the value of invoice finance in helping to address this perennial problem is becoming increasingly realised.
Selective invoice finance is also a flexible funding solution that grows in tandem with the turnover growth of a business, making it especially attractive to seasonal and expanding businesses. Indeed, for fast-growing businesses, the funding not only gives them greater access to capital as their order books grow, it can help to ensure they aren’t at risk of overtrading; taking on more work than they are able to deal with, which can result in an inability to access the working capital needed to cover day-to-day costs and overheads.
The overdraft reality
Overdrafts have traditionally been regarded by many as a staple, “go to” source of funding to help support business needs and drive growth. Certainly, there can be no denying the value they can bring to businesses and that they have the “familiarity factor”. But the fact is that they are becoming harder and harder for SMEs to secure. Figures have shown that lending to small businesses via overdrafts is dropping by up to £100 million each month, and the total value of such facilities has fallen by 42% in the last five years – from £20.9 billion in April 2011 to £12.1 billion in March 2016. In addition, a recent survey of business owners revealed that 30% saw reductions imposed on their overdrafts between 2013 and 2015, while approximately 17% reported having their overdrafts completely removed. Indeed, a huge problem with overdrafts is that they are repayable on demand and can be withdrawn at any time. Furthermore, unlike invoice finance, the limit tends to be fixed. This means that, should more be required to facilitate expansion and progression, companies are required to submit a whole new application, which can be involved and time consuming.
As the availability of facilities such as overdrafts and loans increasingly disappears into the ether, it is important to understand that there are other, effective options for businesses seeking short term cash flow solutions. Alternative financiers value the SME market, and many businesses that may have been denied finance elsewhere could find the support they need through these channels. Indeed, with new providers offering solutions based on innovative technology capabilities such as real-time data availability and risk management, they can certainly give banks a run for their money when it comes to meeting the needs of the SME sector.
Satago is an all-in-one online finance and cash-flow platform offering finance and receivables management to micro-businesses and small and medium-sized enterprises (SMEs). The FinTech (financial technology) firm serves a large but under-served business segment in the UK, overcoming the issue of late payments by converting outstanding invoices into cash, and using innovative technology to give small businesses the same level of credit control as their larger counterparts.