The way Britain’s businesses use finance to fund expansion and deal with their biggest challenges is undergoing a dramatic change, according to new research.
Figures from the Close Brothers Invoice Finance quarterly Business Barometer survey show that UK companies are increasingly turning away from mainstream bank finance to deal with issues such as late payment and cash flow uncertainty, as well as to help them to take advantage of growth opportunities.
The research also highlights the damaging impact that late payment is having on a large number of small and medium size enterprises (SMEs), with many companies forced to write off thousands of pounds every year in unpaid invoices.
Increasingly, businesses are taking advantage of the extra services offered by lenders to address potentially damaging cash flow and late payment issues.
Where businesses look for finance
The Business Barometer indicates a steady but marked decline in the proportion of businesses that seek credit via a bank overdraft or loan.
In August 2017, 23.3% of firms usually use a bank loan, while 14% planned to use an overdraft to finance their business objectives. However, over a third now say they would turn to invoice finance to help exploit growth opportunities, take on new staff, or invest in new technology, for example.
So why has traditional bank lending fallen out of favour? In the wake of the credit crunch, banks became more reluctant to lend on overdrafts.
Another issue is that businesses are now more knowledgeable about what alternative sorts of finance are available – they can use the internet to research their options more thoroughly. And a further factor is that with a combination of asset and invoice finance, a business can generate more money. An overdraft or a loan is a fixed amount: it doesn’t increase based on your turnover in line with the performance of the company.
Removing barriers to growth
The Barometer found that cash flow issues were the most commonly cited as a barrier to growth by businesses.
1 in 10 firms said restricted cash flow was the main reason they could not implement expansion plans. The rise in the popularity of invoice finance reflects in part how well it can address cash flow concerns. The amount of commercial loan or overdraft finance a business has access to, on the other hand, is fixed in advance and does not respond to changing needs or fluctuations in cash flow. Perhaps as a result of improving economic conditions, a greater proportion of firms seeking invoice finance deals are doing so to take advantage of growth opportunities.
As an indication of burgeoning confidence, the Business Barometer found that 65.56% of companies now think that the worst of the UK’s recent economic problems are behind us. As such, firms are now more likely to seek to expand their operations.
But invoice finance is not solely about growing a business. As being able to draw money immediately means you can pay suppliers more quickly and take advantage of better terms. In itself, this can offset some of the cost of the invoice finance facility.
Invoice finance can also give business owners and finance directors valuable peace of mind. With invoice finance you don’t have to worry about whether there is money in your bank or in your credit facility to ensure your business keeps functioning.
Dealing with the heavy toll of late payment
The Business Barometer also looks at the number of firms which suffered from customers settling invoices late, as well as the impact these late payments had.
In August 2017 28.6% of SMEs said that they were adversely affected by late payments.
Overdue invoices do have a significant impact on business’ ability to function. Almost two-thirds of the SMEs affected by late payments said they made cash flow difficult to manage, while 12% said the practice “seriously threatened” their ability to trade.
Around 16.6% firms complained that overdue invoices resulted in them having to rein in what they described as “necessary spending”.
A drain on time and cash
Dealing with late payers also appeared to be a significant drain on the time of staff: a quarter of firms say they spend a week or more every month chasing overdue invoices, while 30% spend at least two days a month doing so.
Worryingly, a large amount of money is simply written off by firms as a result of overdue payments, the Barometer found. According to August 2017 figures, just under half of SMEs affected by late payments ended up writing off between 1% and 10% of their annual turnover. But 19% of companies said that they lost between 10% and 25% of their yearly revenues because of unpaid invoices.
While these figures are concerning, there are steps that businesses can take to deal with late payment and mitigate its ill-effects. One form of invoice finance, factoring, involves the borrower also outsourcing the collection of invoices to the lender.
Another popular option is bad debt protection, which can be called upon in the event customers fail to settle their invoices.
Whatever challenges your business faces, whether it is ensuring a reliable flow of income, dealing with customers that pay late or obtaining the funds needed to make the most of growth opportunities, the right finance deal can be the difference between success and failure.