SME Alternative Funding Options

Selective invoice finance

With CBILS and BBLS ending, it feels like the government has shifted focus away from emergency support and on to recovery.

While the replacement government-backed “Recovery Loan Scheme” (RLS) was launched on 6th April, it is more akin to a normal business bank loan, with associated lending criteria and credit checks which will preclude a high number of businesses.

So where does that leave the many SMEs who are yet to see a return to pre-Covid trading levels and still need access to working capital?

As the economy starts to open up and leave the pandemic in its wake, we firmly anticipate a growing trend towards asset-based finance.

Selective invoice finance gives SMEs a reliable source of cash flow with limited risk, and far more flexibility than full-ledger factoring or invoice discounting.

UK late payment debt has risen by a huge £10.4 billion in the last couple of years alone. According to Pay.UK, SMEs spend more than £500 a month chasing overdue payments, and collectively face an annual bill of £4.4 billion to retrieve money owed.

Since Covid-19, businesses in all sectors have taken a hit in one way or another, so it comes as no surprise that these figures have continued to rise at an unnerving rate.

With many firms implementing crisis management plans in response to problems caused by the pandemic (growing costs, less sales and the late payment problem), there has been an increase in the number of businesses turning to selective invoice finance. Which begs the question, is this a temporary solution, or one that’s here to stay?

What is selective invoice finance?

Invoice finance is a form of short-term funding that enables a business to raise money against its unpaid invoices. In essence, invoice finance providers receive invoices in advance of their payment due date, financing businesses there and then so that they don’t have to wait until payment terms lapse.

There are three main types of invoice finance – factoring, discounting and selective. Selective invoice finance simply means that receivables are sold on an invoice-by-invoice basis, as opposed to the full sales ledger being sold to the finance provider.

This type of finance helps to alleviate cash flow issues created by late and unpaid invoices, seasonal fluctuations and sales dips.

Why is selective invoice finance growing in popularity?

More and more businesses are turning to alternative forms of business funding, such as single invoice finance. Traditionally, common funding products like bank loans have been largely inaccessible to SMEs, due to the fact these businesses aren’t always able to meet lenders criteria for borrowing.

Despite an increased number of loan products entering the market, there remains increased risk tied to these options. Typically, business loans require long-term commitments and call for business owners to put down expensive equipment, inventory or even property to secure the loan against. This is because, in the event a business defaults on its loan repayments, the lender wants to ensure they won’t be left out of pocket.

For many start-ups and small businesses, this type of borrowing poses a risk too great to take. As a result, several firms are choosing to pursue lower risk funding options, which is where invoice finance comes in.

Selective invoice finance works by enabling businesses to pick and choose which pending customer payments they would like to raise money against, and is able to offer businesses a reliable source of working capital with limited risk, filling the vacuum in the business-banking gap, offering greater flexibility to businesses that need it most.

Lynne Gowers
Penny Freedom
April 21 2021