In the UK there is a continued reluctance by the big banks to provide the necessary funding to small and medium sized enterprises. In fact, Managing Director of Askew Accountants Neil Askew would go as far as saying:
“The traditional funding markets are effectively closed to all but the absolute cream of the crop. Having said that, if SMEs follow solid business plans and have a clear strategy, there are alternative lenders within the market place that will support them.”
So, how is this support provided? New UK challenger bank Aldermore have a number of alternative lending options in place which can provide SMEs with the help they need to succeed. These specifically include invoice finance, made up of factoring and invoice discounting at Aldermore.
According to research undertaken by Aldermore whereby 300 SMEs were surveyed, 38% of these said they would use their own existing resources for growth, as opposed to relying on bank loans or business overdrafts which are less than forthcoming.
Short of having already existing funds in place to push back into the business for expansion, the ideal solution comes in the shape of invoice finance as this enables an SME to harness their already existing capital tied up in their invoices. One of the most difficult challenges faced by SMEs is cash flow, as even if they have completed work or have a full order book, the time delay between issuing an invoice and receiving payment can cause severe issues.
Invoice finance provides immediate access to that cash flow, by freeing up the funds. Once an invoice finance agreement is in place, the funder (for example Aldermore) will free up an agreed percentage of the total of the invoice. In the case of Aldermore this is up to 90%. The remainder will be received once the client pays the invoice in full.
The immediate benefit of invoice finance is that cash flow will be freed up, without the requirement to go into any debt. This will also increase incrementally with the size of the business.
Invoice finance can be broken into two distinct products.
With a factoring service the control of the sales ledger will be overseen by the funder (in this case Aldemore). This will involve chasing payment from customers and ensuring they adhere to the terms and conditions of payment.
An SME that chooses an invoice discounting service will retain control of the sales ledger keeping the invoice finance agreement confidential and ensuring the day to day contact with their client base remains in existence.
An additional element to an invoice finance service which protects the position of the SME includes debt recovery services and bad debt protection. Using existing reserves to grow a business is starting to appear an attractive option.