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Has invoice finance become a mainstream form of funding?

POSTED: 28th April 2014
IN: Business news
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Alternative forms of funding have become all the rage amongst UK SMEs in recent years.

Having found themselves turned away from the traditional high-street banks at the height of the economic crisis, the country’s small businesses were driven to look elsewhere for the funds they needed for growth.

And one of these new forms of funding has stood out above all others. Despite in the past being closely associated with ailing businesses looking for a last-gasp solution, in recent years, invoice finance has emerged as a reliable funding solution.

A record-breaking quarter

In 2013, there was a distinct upward trend in the turnover of clients using some form of invoice finance, which grew to over £275bn – or by 10 per cent during the 12 month period according to the Asset Based Finance Association (ABFA). This was particularly evident in the final quarter of the year, when the total sales figure reached £72.7bn - beating Q3’s figure by over £1bn and breaking the £70bn barrier for only the second time in history.

And, further signifying that UK businesses are grasping at the opportunity to access finance for growth with both hands, the export figures for both invoice factoring and discounting saw year-on-year increases of 18 and 12 per cent respectively.

An image overhaul

As we mentioned previously, invoice factoring and discounting have, in the past, become synonymous with struggling businesses that needed an imminent cash injection just to stay afloat. However, recent statistics have shown how ‘invoice finance’ emerged as the most popular search term when it came to seeking out business finance online in 2013. In fact, over the last seven years, the number of searches for ‘invoice discounting’ has taken a 30 per cent blow, as Google users adopted the more modern and optimistic terminology ‘invoice finance’ instead.

Simon Burslem, marketing manager at SiteVisibility, which compiled the research, commented, “This research confirms the shift away from traditional bank lending to small business which has shrunk by a quarter since 2011.

“More small businesses are turning to alternative forms of funding in order to survive – it is providing life support to the SME market and is vital to give it extra impetus to boost the economic recovery.”

Making the traditional lenders work

And it seems this shake-up has left traditional high-street lenders scrambling to keep up. The SiteVisibility research also noted that some major high street banks found themselves slipping behind their more agile competitors in the Google rankings – with just two lenders (including Aldermore) managing to garner a 100 per cent share of the industry’s ‘invoice finance’ keywords in the top ten of Google.    

So just how has invoice finance emerged so strongly as a form of funding, and why are small businesses allowing it to trickle into mainstream business banking?

Why invoice finance?

Perhaps at least one contributory factor to its success is that invoice finance supports cash-flow at every stage in the business cycle, from start up through to business development, and right up to mergers and acquisitions. Regardless of whether the aim is to keep cash flowing through the business or grasp growth opportunities, invoice finance simply allows businesses to operate more efficiently.

Caption: James Cain from Harrogate Water explains how invoice finance has helped the company to make the most out of its invoices 

To illustrate, one of the biggest problems facing SMEs today is late payment. A new report from European payment systems provider SagePay revealed that the average business is owed £11,358 in unpaid invoices, as the total late payment debt to UK SMEs escalates to £55bn. For a business that is being stifled by late payers, invoice finance frees up cash flow and liberates them from their dependence on clients.

On the other hand, businesses that are growing rapidly are at a much increased risk of overtrading. This is a phenomenon by which businesses that have a lot of demand for their services encounter a bottleneck effect on their finances.  In turn, this means that they are unable to service demand, which can stifle growth and damage their reputation.  To avoid this fate, a cash flow plan is essential – and when you’re looking at long payment terms and potential delays– invoice finance can be the lynchpin that keeps it all together.

A mainstream form of funding

The changing public perception of invoice finance, coupled with its availability over traditional lending and propensity to be used at any level of business has pushed invoice finance into the mainstream above the other alternative forms of finance.

As Kate Sharp, boss of ABFA, states: “invoice finance is essential to the strength of the British economy as it is one of the few forms of finance growing and available to firms. Sectors such as manufacturing and construction depend on this type of finance to fund both on-going trading and finance corporate growth.”

If you want to unlock cash to keep your small business trading effectively, or for more information about business finance, don’t hesitate to get in touch with one of our expert advisors.

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