Time to Fill the Funding Gap
A quick look at the alternatives to bank finance to help keep your cashflow running even if the banks say no
For a small or medium sized enterprise to survive, funding is essential. New start-ups need the capital to first establish themselves, whereas those further down the line may need income to stabilise the business or to grow and expand into new markets.
Many look to the banks to provide this funding however, in the current economic climate, many banks are not providing lenders with the capital they need to make a success of their venture. For example, in the second half of 2011, more than 60,000 loan and overdraft applications from small and meduim enterprises worth as much as £3bn were rejected by the high street banks.
Alternative forms of finance
If small and meduim enterprises are struggling to secure finance from traditional lenders, it follows that in order for them to survive they must find the capital somewhere else. Whilst many are turning to friends and family members, this represents an unsustainable business plan.
New solutions have developed however, in the form of invoice finance such as factoring (including confidential factoring) and invoice discounting.
Quick guide to invoice finance
When a small business enters into an agreement with an invoice finance provider, they will receive capital based against the invoices they issue to their customers. If you’re running a small business you’ll be fully aware that when you issue invoices, you won’t receive payment immediately and can sometimes be up to 60 or even 90 days. This income is accounted for, but you can’t access it making it difficult to put financial plans in place.
An invoice finance funder will provide an agreed percentage as soon as you issue the invoice, with the remainder paid once your client pays. The funder will take an agreed admin fee from the final amount.
This is a form of invoice finance whereby the small and medium enterprises places the control of the sales ledger in the hands of the funder’s dedicated credit control department who will chase and secure payment from the client. In most instances the business’ customers will then become aware of the invoice finance agreed however, with confidential factoring the agreement is not disclosed to the customers as the funder will deal with the clients under the umbrella of the small and medium enterprise.
Those that choose invoice discounting will retain the control of the sales ledger, continuing the daily contact with their customers and keeping the agreement confidential.
Invoice finance, as an asset based finance, should not only be viewed as an alternative to a bank loan, for many it can be viewed as the future of small businesses. Not only is the capital provided against an already existing asset (meaning no debt), the amount available increases alongside the size of the business, as the more invoices issued the more capital available.