Invoice finance benefits small businesses by: allowing business growth; protecting cashflow, because late payments and increased credit terms are no longer an issue; providing an alternative to overdrafts and loans that can be difficult to secure at appropriate levels.
This can be seen with two of the fastest-growing industries using invoice finance today. The construction industry has enjoyed an increase of 138% for construction businesses taking up invoice finance from 2007 to 2012, particularly affecting small builders' firms who find it most difficult to secure an overdraft at the levels they need. The manufacturing industry has seen a similar increase in adopters of invoice finance, with an increase of 120% from 2007 to 2012. So why are these industries choosing to take invoice finance as their funding solution?
Invoice finance is flexible; it requires little collateral and takes into account that customers do not always pay invoices on the date of the invoice’s creation. These are especially pertinent reasons for the construction industry, because these businesses are often paid 60 to 90 days after the job is complete.
Invoice finance provides them with a cash advance of any invoices created. By allowing the business to fund projects with the money they would have previously only secured once the job is complete, they can now pay costs such as wages and purchase raw materials, which are required throughout a project’s lifetime.
Banks are unwilling to lend to what is often seen as a risky industry for late and non-payments. This is probably due to construction projects being easily halted by problems such as bad weather, or simply because the job has not been finished to the customer’s satisfaction. These problems can be seriously harmful to cashflow, because the banks are looking predominantly at historical financial data to assess whether a business (particularly a small business or startup) is worth lending to.
Construction businesses that are turning a corner and are in fact profitable, have responded to this by seeking out alternative forms of finance – invoice finance, where funding is judged on the future income of a business rather than its historical records.
Two other extremely popular adopters of invoice finance, according to data from Touch Financial, are recruitment businesses and those in wholesale and distribution. Wholesale and distribution often suffer from late payments, and the nature of the wholesale business means they need a quick stock turnaround in order to maximise income and profits. In no other industry does time mean money more than in wholesale, and invoice finance allows protection against late payment, while strengthening cashflow to allow the purchase of further stock as quickly as possible. This gives the safety and flexibility smaller businesses benefit from the most.
Recruitment is a sector where invoice finance also appears to be thriving. Contractors often require payment before the customers settle their bills and invoice finance provides the working capital to achieve this. Recruitment companies often have few high-value assets, which makes securing a bank loan or overdraft difficult, particularly earlier on in the business’s life. Invoice finance provides cash you are to receive in the future through the invoices you generate today and usually requires little other assets to secure - something an overdraft cannot provide.
Late payments, poor credit history and a lack of assets are all common reasons for small businesses being unable to grow to their full potential. 2013 is likely to see a further increase in the amount of construction and manufacturing sector businesses moving towards invoice finance, while wholesale/distribution and recruitment SMEs should continue to benefit from the flexible funding that invoice finance has provided them throughout the years.
Written by GrahamTripp on behalf of invoice finance provider Touch Financial
Last year, Business Secretary Vince Cable floated the idea of a new business bank, a financial institution whose raison d'être would be to support the UK’s freelancers, contractors and small businesses.
Time after time, official figures prove it’s SMEs that are driving the UK’s recovery, so it only makes sense to support them in every way possible, while the wider economy lumbers back to its feet.
The main function of the business bank will be to help small enterprises raise funds and give them access to credit - something the high street banks are still monumentally failing to do.
There is a fundamental problem with Cable’s proposition, however. Back in September he promised £1bn in funding, plus a matching contribution from the private sector. Hang on a minute, you’re probably thinking, won’t those private sector contributors be the same institutions currently denying credit to small businesses up and down the high street? Quite possibly, yes.
If this new bank is to have private sector involvement, there is a danger the same risk-averse attitude the big banks have adopted will find its way into this organisation, rendering the whole exercise pointless.
As well as being easily accessible, any loans offered by the business bank must be available fast. I have seen many businesses disappear while waiting for loans to make their way through the maze of bureaucracy that blights most financial institutions.
Set up a scheme that allows access to funds within 30 days, guaranteed. Not only would this allow businesses to start up faster, it would allow owners to plan their spending accordingly, with a guarantee that funds will reach them by a certain date.
The government desperately needs to avoid another costly and under-subscribed business stimulus initiative. Past failures such as National Insurance holidays, and more recently the Funding for Lending scheme, will hopefully have given the Department for Business, Innovation & Skills a feel for what works and what doesn’t.
Details are still fairly sparse as to what form the business bank will eventually take, but with a bit of luck Vince Cable will listen to business owners and put together a sensible and useful establishment - and not one that exists solely to turn a profit for its commercial backers.
Written by Darren Fell, managing director of Crunch Accounting.
The business plan is going well, your idea seems to have feet but you face a major problem. You need money to get your new business off the ground.
Securing funding is one of the most common start-up problems. There are various ways to raise finance, which is a good thing, but many people are unaware of all of the options available to them or are unsure about how they work. Do your research to find out how you can raise the funds you need in a way that best suits your business. Here are the pros and cons of some key start-up funding options.
Banks and building societies
Venture capital trusts
Crowd funding and peer-to-peer lending
By Erin Walls of Ward Williams Chartered Accountants
At a time when money is tight and resources are dwindling, it might be difficult for start-ups and small businesses to locate the funds they need to thrive and expand. It’s a disheartening situation for those that want to get and keep their businesses on the right track. But even in such times, there are still many institutions, organisations and individuals willing to finance small businesses, from banks to businesses, government bodies and the EU. Impossible? Not quite!
1. There are grants and funding opportunities out there
There might be grants you could qualify for that you never even knew about. Although you might think that having a small shop in a rural area would not be significant enough to secure grant funding, you could be an excellent candidate for a regeneration grant – the opportunities are out there, you just have to find them! For example, have you considered that funding programmes like the ‘Rural Shop Improvement Scheme’ exist? You might not know about the many grants and funding opportunities you could apply for, but dedicated funding websites provide a free searchable database of small business funding opportunities.
2. Don’t be afraid to apply
Although you might have heard that grants are difficult to secure, they are worth trying for. Nothing ventured, nothing gained. If you are passionate about your business and think you have a great reason to secure grant funding, you only need to translate your enthusiasm onto paper. Effort is required, but it might be more than worth it. Moreover, there are resources out there to help you write your grant funding applications, and review them. Free resources exist online to help you with your grant applications, like j4bGrants 10 Steps to Successful Grant Applications. There are also special services whereby funding professionals will take a critical look at your proposal and help you write the best possible application you could submit.
3. Stay positive
The fact that so many funding opportunities exist in the midst of a recession means you have as good a chance as any other business of getting the boost you need. Grant funding could provide you with amazing benefits, whether you are an established business or just starting out.
Searching for grants might be time-intensive, but luckily free resources exist to help busy business owners locate funding quicker and more effectively. j4bGrants.co.uk has been re-launched with a new-look website featuring thousands of opportunities for business funding. The site is completely free following registration, and allows you to search by business type, size or location, providing access to information that is constantly updated by a team of researchers who do the time-intensive searching for you. The opportunities are out there – you just have to find them!
With the reduction in small business loans offered through high street banks in these times, news of a possible Coalition scheme to offer start-ups the financial break they need, may sound like a bonus to many bank managers.
Hopefully, the Tory business bank will be offering nice promotional gifts like high street branches of Lloyds, Halifax or TSB have to incentivise the customer. At the very least they could hand a silvery pen out of it as they sign your business up for more of the government’s borrowed money from the IMF.
Chancellor George Osborne’s claim that it is "all the alphabet soup of existing schemes” should spell “the Tory way of tidying away bitterly disappointing incentives one to one giant kid’s meal, the kind that lacks XYZ of investment capital for genuine high-street money lenders at a time when the UK economy is in recession, without beans”.
The UK economy has statistically been suffering under the weather from a cloud of uncertainty forecasted by the so-called ‘big-four’ high-street Banks. A sector-based approach is a new way in which the Tories can withhold currency and lending to the banks, while having a stronghold in the business investment market and sell assets to small businesses and provide them the breakthrough that has been waiting in the wind.
Ahead of the speech, at Imperial College, London, Cable said that there was a "real shortage" of the "long-term patient capital" needed by businesses to grow. Larger businesses were "by and large" capable of raising short- and long-term finance via capital and equity markets. Meanwhile, the latest SME Finance Monitor showed that in the last 12 months, 33% of businesses that applied for loans were rejected.
Maybe it is along the path but this is still only in initial talks, meaning that the government need to open a tin of beans on-cue and finalise on its structure and offering to selected sectors, choose smaller ‘challenger’ banks and non-bank sources to take on the so-called ‘big-four’ and perform more like a business.
When Vince Cable addressed the public, the follow up indicated that it could shop around to find the tin. Smaller banking providers such as the Co-op, German lender Handelsbanken and Aldermore, are all contenders. By and large Aldermore sound like front-runners. In March, they announced their intended participation in the Government's National Loan Guarantee Scheme (NGLS) providing small businesses to borrow at a lower rate. The partnership would, Cable said, boost these smaller banks' lending capacity as well as round up existing co-investment and guarantee schemes.
Hopefully, this would lead to relief from this financial gasp and finally you start-ups out there will have the power to fulfil your destiny and have the financial backing you needs.
Recession continues to provide the backdrop for the UK economy, directly impacting the financial health of small businesses. Research shows that small businesses are more in debt now than at any time since the late 1990s. Those with a turnover of up to £1 million now owe around £1.60 for every £1 of turnover, compared with £1.17 debt per £1 of turnover ten years ago. Furthermore, the most recent figures from the Bank of England show that in the three months to May 2012, the total lending stock shrank by £3bn.
The credit crunch and recession has made securing finance tougher for small businesses, but that doesn’t mean that raising money is impossible. Banks, investors and business angels are always open to the suggestion of backing well-run businesses with a strong sense of direction and good management team.
How to prepare for funding success:
Funding options to consider:
The overall message to take away is this: whether you’re looking to acquire additional capital or fund the launch of a new company, do not give up! Achieving investment requires a little creativity and a lot of perseverance and determination, so set realistic goals and be prepared to explore several options.
BCSG creates, distributes and supports value adding products and services to small businesses through financial institutions.
Starting your first business can be a daunting task and raising finance can often seem impossible. So what are your main options?
1 Savings and self-finance
Start putting money aside soon as you can. If your long-term aim is to start a business, cut down on your spending and save as much as you can from your current wages. I moved in with my parents, paid a much lower rent and saved hard to ensure I had as much money as possible before starting my first business.
Cash in any ISA’s or savings accounts. If your business is successful, you may get a much greater return on your money than you currently get, with interest rates as low as they are.
If you have no capital, it is difficult to get finance, especially post credit crunch and with no trading history. Banks require a detailed business plan, preferably with three years projected forecasting and profit/loss models.
However, as interest rates are currently low, a business loan can be a reasonably cheap to borrow. The new Enterprise Finance Guarantee (which has replaced the Small Firms Loan Guarantee Scheme) is useful for start-ups with no capital. Under the scheme, the Government guarantees 75 per cent of the loan should the business be unsuccessful. The EFG is available for businesses with a turnover of less than £25m and offers loans up to £1m. If you borrow under this scheme, you will have to pay a set-up fee, plus a quarterly fee for the borrowing.
Shop around for the best deal on any bank loans – interest rates can vary dramatically. With my original business loan, I naively accepted the first one I was offered (at an extortionate rate) as I was convinced I would not be offered another. Six months later I approached a second bank and moved it, saving me 5 per cent interest.
3 Investors – family and friends
It can be worth approaching family and friends to see if they will invest in your new venture. Discuss various levels of involvement; some may expect a share of your profits, while not wanting involvement in the running of the business (a silent partner). Others may be happy to lend long term, receiving only interest payments, as does one of my investors.
Whatever the situation, always make sure both parties take independent legal advice and draw up an agreement outlining the terms. This prevents any potential problems if the future relationship breaks down.
4 Investors – business angels or venture capitalists?
Look for financial involvement from established business people, either in the form of a business angel (ie a local businessperson who lends money to businesses) or a private equity provider (ie usually more suitable for larger businesses with higher turnovers). Both can provide a wealth of information and assistance, especially if they have relevant contacts. In return, they will expect a share of profits and possibly a share of the equity.
Be cautious about giving away too much control over your business. You must also find an investor that is right for you and the business – having a good working relationship is a must. If you feel this is unachievable, don’t take the risk.
Whilst notoriously difficult to gain Government or EU funded grants, it’s worth making enquiries in your local area to see if you are eligible for help. The EU has a wealth of grants available, especially in rural areas, but they are badly advertised and difficult to access.
The Princes Trust is useful to young people starting up a small business, but the loans offered are fairly small and the criteria strict – although they are helpful for people from disadvantaged backgrounds.
If you are restoring an older property as part of your business, see if you are eligible for support from the local council, English Heritage or local conservation trusts.
6 Reducing Costs
It pays to keep your start-up costs as low as possible, of course. You could get equipment on hire purchase or loan or use a ‘rent a desk’ scheme, for example.
Utilise your friends and acquaintances – perhaps you know designers, IT professionals or PR experts? Set up a social networking account (eg Twitter) and find others in your area who are setting up businesses – perhaps you can exchange skills. I’ve done this many times – exchanging free coffee for help with my website.
7 Don’t put all your eggs in one basket
Share the risk when starting up. Spread the borrowing and the repayment terms. This will make everyone – including you – feel less vulnerable.
Sadie Hopkins is founder of York Coffee Emporium