Many small and medium-sized enterprises (SMEs) in the UK face constant problems when it comes to the day-to-day running of their business – with one of the biggest being waiting for their customers and clients to pay.
Offering a credit facility to customers sounds simple; You complete the work or the service, send an invoice to your customer and wait 30 days for them to pay. However in reality it is anything but simple, with many SMEs having to wait long periods of time for payment from other businesses. This can dramatically affect their cash flow and causes issues when it comes to available capital to expand their business, as well as the funds to meet their own monthly payment deadlines and keep things afloat.
In order to minimize the impact of late payment, there are options available to SMEs.
source: laughitout.com
Invoice Finance
The first place to start is with invoice finance. This is a structured funding facility which frees up existing capital tied up in invoices. As the funding provided is structured against invoices there is no requirement to go into debt, as is the case with a bank loan or business overdraft.
Cash flow is released without onerous conditions of lending. But how does it work?
Once an invoice is issued, an agreed percentage will be issued by the funding provider, such as TBS Capital Funding, usually within 24 hours. This immediately frees up cash flow, without the requirement to rely on standard business conditions for payment (assuming the invoice would be paid on time). As the customer pays the invoice in full, the remainder will be provided to the SME, minus a small admin fee taken by the funder.
In simple terms, invoice finance can be split into the following products:
- Factoring
- Invoice discounting
Factoring
The funder assumes control of the sales ledger, removing the time consuming job of chasing clients for payment.
Invoice Discounting
The control of the sales ledger remains with the SME, keeping the invoice finance agreement confidential from their clients.
Choosing the Right Option
Factoring is best suited for businesses – including start-ups – whereby customers are invoiced on credit terms or in arrears, as the sales ledger will be professionally managed on their behalf.
Invoice discounting is better suited to those businesses who already have an established credit control department and which have an annual turnover of £250,000 or more.
The tools are there to help SMEs so it’s important they make the right decision.
It’s great to see some financing solutions available for SMEs. I wonder how small the admin fee is, but in any event, at least it offers potential for businesses who have been abandoned by the banking system.
Furthermore, I hear our “favourite” payday lenders are moving into providing short term lending for businesses. Surely a service like Bibby’s would be better suited to businesses!
Interesting stuff. Delays in payment of invoices can send so many small businesses and sole traders to the wall especially in the current climate so it’s good to know about services that can help.
Admin fees would be a huge consideration for most. Disruptions to cash flow are inevitable but would be interested to know which services in particular you would endorse.