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Putting SMEs first: the alternative to the overdraft

Putting SMEs first: the alternative to the overdraft

The regulatory landscape in the wake of the financial crisis has resulted in a significant portion of bankfunding being withdrawn – including the traditional, long-relied upon overdraft. Consequently, many small- and medium-sized enterprises (SMEs) are struggling to finance working capital and effectively manage their cash flow. Yet with late payments a fact of business life, SMEs must find new ways to optimise their cash management. Steven Renwick,CEO & Founder of Satago Ltd, discusses how invoice finance would provide an ideal solution.

Steven Renwick

Steven Renwick

There are 5.4 million small- and medium-sized companies (SMEs) in the UK today[1]; the backbone of our economy. All have been set up by entrepreneurs that have gone into business in order to do business – yet many spend up to 10 hours per week chasing late payments. Indeed, 60%[2] of the country’s SMEs experience late payments, with the average business owed over £38,000.Not only is this a misuse of resources, it forces many SMEs to seek ways to make up the shortfall to maintain their cash flow.

Yet successfully obtaining funding is all the more difficult in today’s banking landscape, when working capital loans and overdrafts have all but disappeared from high street banks due to the significant regulatory shake-up in the banking industry. More stringent capital-adequacy requirements introduced in the wake of the 2008 financial crisis have forced banks to not only clean up their balance sheets – ending many credit lines or overdrafts with SMEs – but to become far more selective when it comes to lending.

SMEs have been particularly badly hit in this respect, with many banks withdrawing from the lending market for all but their most favoured (multinational) clients. This means that, while many SMEs have strong theoretical cash flows, they are nonetheless threatened by the lack of suitable financing options at key moments in the credit cycle. Unable to offer credit terms, they are losing business. Furthermore, these stricter lending conditions show no sign of abating, meaning that the “common overdraft” isn’t set to make a comeback any time soon.

Thankfully, such conditions – combined with new technology innovation that is driving digital capabilities and enhancing customer experiences – have created a hotbed for alternative financiers to enter the market. For example, the UK online alternative finance sector grew by 84% to reach £3.2 billion in 2015 (up from £1.74 billion in 2014)[3].Despite alternative financiers increasing their share of the business finance market, however, there remains a lack of awareness of the resources that are available beyond banks. And without the knowledge of the full extent of options out there, SMEs can be at the mercy of expensive alternative lenders.

Certainly, with late payments an ongoing issue,SMEs need to be able to access affordable yet flexible funding that allows them to improve their working capital and leverage business opportunities to the full.

Debtor management

Without doubt, debtor management can be a perennial headache for many businesses, with late payments occurring due to a number of reasons, including misunderstandings, incorrect assumptions, disorganisation, financial difficulties and short-termist clients (those that use you as a risk-free zero interest loan opportunity – despite being a multi-national giant!)What’s more, businesses can sometimes fail to prioritise actively and effectively managing their credit control functions; instead focusing on sale generation itself. Of course, sales cannot equate to turnover if payments cannot be collected.

Even with the most proactive of credit control strategies, however – which include the thorough analysis of customer credit risk data, and leverage sophisticated technology capabilities such as an accounts receivable customer relationship management (CRM) system – there is only so much that optimisation of debtor management can achieve. Some customers will always pay late, and some insist on lengthy credit terms, which can prove particularly challenging for small businesses.

Optimising cash flow

None of these problems are new, and the numerous reasons for late payments make it a difficult culture to change. Yet there are new solutions emerging that are designed to address such issues. Indeed, following the financial crisis– and further-fuelled by developments in cutting-edge technology – alternative sources of lending have gained traction. As a result, invoice finance is becoming an increasingly popular alternative to the overdraft.

What’s more, an overdraft is effectively a loan, which undergoes regular reviews by banks and therefore holds the risk that it may be decreased or even withdrawn. This is especially likely to occur if a company’s financial statements reflect sluggish growth or a weak performance – i.e. when a business may be in particular need of the funds.Certainly, for the most part, an overdraft is more suited as a fix for short-term cash flow needs, rather than relied upon as a long-term means of addressing recurring late payments.

Invoice finance enables companies to immediately release cash tied up in unpaid invoices, freeing up working capital and facilitating improved cash management capabilities. It is a flexible funding solution that can grow in tandem with the growth of a business, making it attractive to seasonal and expanding businesses. Such facilities can offer a dynamic, near-instant source of finance.

While most invoice finance companies finance an invoice when it is raised, and can find themselves anxiously awaiting payment when the invoice becomes overdue,Satago Invoice Finance has taken a new approach:funding invoices from when they are raised, up until when they are due, and sometimes even when they are overdue. This ensures as much value of an invoice as possible stays in the pockets of SMEs, making their cash flow more reliable, reducing the need for reliance on funding and keeping costs to a minimum.

A key element to this just-in-time provision of invoice financing is the new technology being employed by the innovators. Not only is this an online platform allowing easy and transparent access and execution, the fully-integrated credit control elements to the platform mean that the financing is offered only as and when it is needed, and – in many cases – removes the need for it to be initiated at all.

With overdrafts on the decline, SMEs need to ensure they have a strategy in place to address the issue of late payments. Equipped with effective finance solutions to cover the funding gap – and a proficient credit control strategy that helps avoid the need to chase payments – SMEs can feel confident they are in control of their cash flow, and positioned to optimise their sales to the full.

[1]www.parliament.uk/briefing-papers/sn06152.pdf

[2]http://www.bobsguide.com/guide/news/2014/Jul/25/the-real-cost-of-late-payments/

[3]uk-online-alternative-finance-market-grows-to-ps32-billion-in-2015

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