Ant Persse, CEO of Optimum Finance [1], explains how Invoice Finance can be used as a route to combat late payment, increase liquidity and enable businesses to grow.
Access to traditional sources of funding is contracting, just at the time that businesses need money most as insolvencies increase. Companies often become insolvent not because they are inherently bad businesses, but simply because they run out of cash.
Periods of poor cashflow management, compounded by bad debts, high material and labour costs and slow paying customers are typically to blame. It's a vicious cycle and businesses need support and guidance to overcome financial pressures and enable them to move from ‘survival' to ‘growth'.
The cost to business
The cost of late payments to small businesses has more than doubled in two years, reaching £1.6 billion at the end of 2023, according to a report by Xero [2]. A similar survey of business owners, conducted by PayIt, NatWest's open banking solutions provider, revealed that last year, around 27% of UK SMEs were owed between £5,000 and £20,000 in unpaid invoices. Over half (55%) of this sample said that late payments increased in frequency over the same term.
With SMEs comprising 99% of businesses in the private sector, this comes as troubling, yet perhaps unsurprising news. Particularly in the case of suppliers, or any other business-to-business firm, where being paid late means that they are required to pay out for wages, materials and business overheads, while waiting to be paid themselves.
Perhaps more worrying, however, is that many SMEs are being denied funding by ‘traditional [3] lenders and banks, due to stringent regulations and criteria that particularly newer or smaller businesses struggle to meet. In fact, according to a survey by the British Business Bank, an alarming 21% of SMEs seeking external finance were rejected by mainstream lenders. For many businesses struggling with access to finance, now is the time to turn toward alternate lenders to pursue their ambitions for growth.
Take for example, a recent customer, CCT Demolition, a specialist recruitment agency in the esoteric field of demolition and asbestos removal. As a recruitment agency, meeting payroll obligations on a weekly basis for temporary staff, while working to extended payment terms themselves, was an obstacle to growth and left a large hole in company cashflow that needed to be filled. As is the nature of a candidate driven industry, retaining staff - particularly in such a specialised industry where staff must be trained and qualified to handle hazardous materials - bears a cost. CCT Demolition found the solution to its challenges in the form of a tailored Invoice Finance facility.
Director at CCT Demolition, Aidan Tait, says the benefit of Invoice Finance is that it opens an immediate avenue for cashflow: "Working with Optimum has allowed us to bridge the gap between payment cycles, whilst paying staff and suppliers on time, with what is effectively our own money. It enables us to further strengthen our business position and grow, without the stress or hassle of chasing payments. And as we grow, so too does our Invoice Finance facility with Optimum."
A ‘new conventional'?
While conventional loans and Invoice Finance both drive liquidity and access to funds, conventional loans create debt, whereas Invoice Finance does not. Essentially, Invoice Finance is the purchase of an already issued and unpaid invoice, used as the principal asset against which money can be raised. By unlocking the cash held within unpaid invoices (i.e. receivables), businesses can raise funds almost immediately for a product or service already delivered, but not yet paid for.
With technological advancement has come development, and with other products like Open Banking, Invoice Finance providers now have access to more information than they would have had historically and are able to interrogate that information to make better informed decisions to unlock more cash. Access to cloud-based accounting platforms, for example, enables customers to upload their ledgers more easily and quickly - and funders can give them immediate clarity over how much money is available to them and what it's costing.
Where historically it may have been seen as a last resort proposed by big banks when they had exhausted all other avenues open to them, companies like ours strive to disrupt this narrative and drive awareness for a product that has long been misunderstood. But many businesses are unaware that this product exists. And it's not just about the cash; availability is key.
With Invoice Finance, there's a higher likelihood of acceptance compared to more conventional funding types, and many firms can support you with direct credit management expertise. Businesses like Optimum Finance can help to alleviate the administrative burden of chasing payments too, effectively managing your sales ledger and providing credit risk management, credit control and reconciliation. In so doing, we help you with the things that businesses don't want to do, or are not especially skilled at doing, so that we can leave them with what they do best - and gear up for growth.
But perhaps most importantly, we put a face to our facility, serving as an extension of a business in need of support - not just as a ‘simple' finance facility. In the context of a declining appetite for funding across all industries, what businesses now need is a steady hand, and the confidence that their cashflow is protected and the money there when they need it.
For more information please visit Optimum Finance [4]