By Inderveer Tatla, Chief of Staff, AREX Markets

With pressure mounting on SMEs all over the country, keeping a close eye on working capital is a major priority. It comes as no surprise that UK Finance’s Business Finance Review found that among its members, there has been a significant increase in businesses seeking invoice financing options in the first half of this year alone. Economic conditions have only worsened since that time, and many small business owners are voicing real concerns about how they will survive. As so much progress has been made to innovate the invoice financing industry, led in many cases by new offerings from the alternative finance space, here are some top tips for businesses looking to unlock the value in their often delayed process of issuing invoices.

Set aside any preconceptions

The invoice financing services offered today are not the same as those led by big banks ten years ago. All too often, this option is seen as a method of last resort by businesses, concerned about what it would say about their business operations. However, modern offerings no longer take a sizable chunk out of the return to the business, and have been structured to be much fairer. Our offer, for example, has been crafted to give small businesses the most flexibility possible, with options of just financing single transactions as well as more common longer term contracts. This means that businesses can just trial the service if they are unsure, or keep control of their finances by only utilising this offering when needed.

Tackle the late payments problem at source

One of the biggest problems many small businesses face is late payments, often from much larger providers with set contract terms. This issue is sharpening in the current climate, and studies have shown that smaller businesses are facing longer and longer delays on their issued invoices. Accessing invoice finance services can smooth out this process, overcoming any unplanned or lengthy gulfs in payment and ensuring that money is back in the business where it belongs, especially in time to take care of important monthly outgoings such as paying staff. Average profits for small businesses in the UK sit around £11,000 while the current average for amounts ‘in waiting’ from late payments per UK SME is around £20,000, according to Sage. And the extra cost of late payment that small businesses incur to tackle late payments sits at a staggering £684m according to Xero – it’s easy to see how this state of affairs leaves UK SMEs incredibly financially vulnerable.

More effective business planning

We have worked with a number of small businesses who have told us that access to invoice financing has transformed their business operations by allowing them to plan ahead more effectively. Particularly, in sectors such as construction, smaller operators often feel pressured to accept longer payment terms to be able to access sizable contracts. However, the late payments issue means that these companies often find themselves squeezed when it comes to taking on the responsibility for securing workforce and materials ahead of time. Examples such as this place a tremendous burden on the SME. Accessing invoice finance regularly can mitigate these cost burdens, which means that companies can overcome any sizable outgoings; ensure that the working capital within the business is sustained at a workable level; and also let them forecast more effectively based on that financial security. Many have been able to bid for – and win – more sizable contracts as a result, and ensure that their operations are fighting fit and growing. When the country is braced for significant economic discomfort, this option of accessing the SME’s own income, more quickly, frees up both business owners’ time when it comes to chasing down payments, but also lifts the worry about fluctuating cashflow.

Avoid taking on further debt

Perhaps the biggest concern for many business operators at the moment is the concept of taking on further debt to shore up their company finances. Recent research has found that a quarter are looking to take out personal loans to support their businesses, which opens not only the enterprise but also their personal lives up to further risk. The current climate comes hard on the heels of repayments of government Covid loans, as well as facing the impact of widespread lockdowns on company incomes. Businesses who consider financing their invoices will swerve burdening their balance sheets with additional repayments – not to mention the time it would take to research and find the best interest rate option for business lending in the market and calculating the likely impact to the company books in the long term.

When it comes to invoice financing, not all service providers are the same, and savvy business owners should look carefully at the small print and understand the cost of financing before seeking to access cash. But in a market where many SMEs are facing significant business challenges, reconsidering the invoice financing option may just provide them with the financial flexibility they are looking for.