Late payments are a perennial issue for SMEs. This roadblock has reared its head again recently with the publication of a recent report stating, against the backdrop of Covid fallout, almost two thirds of small businesses (65%) believe that late payments are putting their businesses at risk. This is also the thinking behind new initiatives such as Good Business Pays, encouraging larger companies to fast track payments to smaller businesses, helping to level the playing field and reduce the pressures on smaller enterprises’ finances.
As a result of these pressures, the research also found that businesses have been looking to open or extend lines of credit, potentially opening their finances up to the burden of further debt issues. Late payments are nothing new to the country’s business, but they are sadly pretty commonplace. When a business is facing the sharp end of those pressures, the solutions can seem limited. Getting a short-term loan can be an instinctive and obvious choice – and has rarely been quite so easy for business owners to apply for. Deceptively simple to apply for online, this option can bring further baggage of high interest rates and is often a stop-gap solution before the business has to take on the repayments, which can fuel a dangerous debt cycle. Happily however, it’s not the only option available to businesses which need to look at unblocking their cash flow.
Invoice factoring, for example, has come a long way from its longstanding image of a ‘last chance saloon’ approach. The days of bank control of this process, bringing with them unfavourable rates and draconian clauses, are quickly vanishing in the rear view. Instead, the factoring industry is being transformed by new brands entering the space and offering alternatives to the ‘old-school’ financing options, especially the typical trilogy of overdrafts, credit cards and loans.
After the ‘08 crisis, the banking industry was often forced to turn its back on SME financing through the surge of new regulation and compulsory risk assessments. Following the crash, an OECD study found that banks had “tightened their lending policies” across the board, with SMEs having “strongly reduced their investment projects financed by credit”.
This period also saw a rapid growth in other options, including fintech solutions which apply the latest technology to some long standing frustrations with traditional banking methods, and this is no different when it comes to invoice financing. At the same time, the government has been actively looking to reduce the dominance of the Big Four banks for both personal and business finance. The market opening up to new approaches, like our own, means that rates are becoming much more favourable to the SME, not to mention providing a faster injection of cash back onto the balance sheet. We’re even now seeing such options becoming embedded through APIs directly into business’ finance software with solutions like Xero Marketplace, making it even more straightforward for companies to unlock their revenues once more without even stepping foot in a bank.
A key advantage of factoring is the removal of extra debt and expensive loans as an SME’s only option. But there are other advantages, and one aligns with the growing trend for more ethical financing, something we feel especially passionate about. Many SMEs have felt for years that standard banking frameworks and decision making have not supported their endeavours, and the rapidly growing numbers of smaller enterprises utilising open banking optionsshows that innovation can help to bridge this gap. Emerging options in alternative finance give smaller businesses many more avenues when looking at their business finances, instead of simply relying on systems which have been set up to benefit others involved in the process. Small companies need support to thrive, which is why our solution focuses on delivering the best return, rather than taking a large cut out of the value of the invoice back to SME.
Cashflow is oxygen to an SME, and delays can suffocate it, especially when readily available alternatives involve additional debt or paying exorbitant fees. The resurgence of invoice financing as a viable option when it comes to SME finance is no longer the gates to the last chance saloon, but instead a potential open door to sustaining a healthy and stable development beyond late payments and lengthy terms. Factoring does not exclude relationships with the banks by any means, which will always provide a multitude of functions that any company, no matter the size, relies on. However, ahead of another unpredictable Christmas season, the modern SME is recognising it is smart to shop around – and that new opportunities are emerging to assist them on their recovery and growth journeys
Article by Perttu Jalkanen, Co-Founder and CCO at AREX Markets.