Can Invoice Financing Unlock Cashflow Hurdles to Growth?

How invoice finance could help small businesses overcome late payment issues and drive their company to success

Can Invoice Financing Unlock Cashflow Hurdles to Growth?

Despite an improving economic outlook and predictions that the UK’s growth forecast will continue its upward momentum, cash flow still remains a significant hurdle for many small and medium sized businesses. According to a recent survey 29% of companies say that late payments are causing major problems for their development.

In a financial environment where lending to small companies by banks has plunged, despite government schemes designed to increase it, irregular and late payments can only heighten the difficulties that enterprises face as they look at growing their operations.

In the worst case scenario, it can cause knock-on problems with paying suppliers, necessitating drawing on emergency reserves and overdrafts. Furthermore money tied up in unpaid invoices is money that can’t be invested in new opportunities, not to mention the time and energy wasted on chasing late invoices.

This can all take directors’ focus away from growing their company and capitalising on new opportunities, which in the long-term can leave a company without the strong strategic planning needed for success.

Invoice financing: A way to tackle late payment problems?

Invoice financing, where a business sells their unpaid invoices on to a specialist third party company and receives a substantial percentage of the money owed upfront, can offer a solution. Once the outstanding invoice is paid the business receives the remainder of the money owed, minus fees charged by the invoice financing company.

Invoice financing, by the two major industry players whose business operations are based on alternative finance models, raised over £235m in 2014 alone. However many British small and mid-sized enterprises are unaware of how it works and among those who do, there are often concerns about the manner in which payment is collected and inflexibility in terms.

How it can work for your small business

At its best, invoice financing can provide much-needed financial stability that allows a company to expand. Viv Parry, who is a director of Leeds-based Exquisite Handmade Cakes, used invoice financing to drive her business’ turnover to £1.6m. She reports that it allows her to receive early payment from a large customer every month and in turn this puts her in a strong position when negotiating with her suppliers, as she is in a financial position to negotiate superior terms.

Another food business that used invoice trading to release working capital is G’Nosh, who found that as their business grew that their cashflow became squeezed, owing to the large upfront supplier costs.

Invoice financing can often be particularly helpful for businesses who face significant upfront supplier costs and a standard gap of 60 to 90 days between submitting an invoice and receiving payment. It’s also useful for seasonal businesses, who face a similar issue of needing to deal with costs months before they might start to receive an income.

The downsides for businesses using this alternative funding model

Any business looking at invoice finance needs to consider some potential downsides. One of the most critical is considering how it could impact relationships with customers, as once an invoice is traded, collection is undertaken by the finance company.

There are two potential issues here. Firstly, a company needs to be sure that payment will be collected in a way that is effective but doesn’t create discord with customers, for example by overly aggressive or otherwise unprofessional methods. Although this is conducted by a third party, it directly reflects on the company who sold the invoice on and could become a reason to switch suppliers.

Secondly, businesses can be concerned that having an invoice trading company contacting their clients for payment could suggest that their business is in trouble. With the growth of market trading as part of the alternative finance sphere, this could become less of a worry. Perhaps the best tactic for companies in this situation is to directly explain to their customers what is going on.

Companies also need to check that invoice finance is right for them. Some providers require companies to meet a minimum turnover level and to show that they’ve been in business for at least six or twelve months; others require that businesses sell their entire invoice book to them, which isn’t always suitable. However, with increasing numbers of alternative funding providers this is changing and the model is becoming more flexible.

Invoice finance can help companies overcome hurdles to growth, particularly when they’re at a point when increased orders or business necessitates access to more working capital, but directors should carefully consider whether invoice finance, and a specific provider or platform, is right for them before they go ahead.

For more information on alternative funding routes and raising finance in general, have a look at Startups.co.uk’s section here.


This article was contributed by business writer and editor, Elizabeth Grey.

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