Late payments have been a plague on SME finances for generations, with the largest and most prominent businesses often the most likely to drag their feet. Invoice finance suppliers have long sought to fill the gap, and developments in technology and an ever-shifting economic outlook have created new opportunities and challenges. Christopher Marchant speaks to key figures in the field.
While there are banks that provide invoice finance to SMEs, there is also a dynamic – and growing – field of independent lenders providing the service.
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Discussing the business’s appeal to consumers, John Gribbon, regional director for Yorkshire and North East at Secure Trust Bank (STB), explains: “Independent providers can be more agile than the bigger banks, as being creative and responsive is part of the appeal.
“STB began with invoice finance, and learned that this was a crowded sort of marketplace, particularly at the smaller end. This led to a decision to expand the capability to operate in the asset-based lending parallel, offering a full product suite with more complex deals and a resulting growth pattern.”
Phil Chesham, director at Positive Cashflow Finance, part of 1pm, adds: “Banks have a huge pool of captive businesses to fund, so they are less likely in the main to look outside conventional parameters because they have the low-hanging fruit in their own customer base. As a result, opportunities can arise to provide funding against potentially very sound businesses that may have been overlooked. The independent market is very healthy as a result of that.”
Benefits to SMEs
While a company may be losing around 4-10% of an invoice’s value by using a finance provider, they are also immediately gaining the cash that may have previously been tied up or in an otherwise precarious position.
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By GlobalDataSharon Wiltshire, UK commercial director at Bibby Financial Services (BFS), explains more about the advantages for SMEs. “Basically, it’s a cash flow enhancement,” she notes. “For any SME to operate in a sensible way, whether they are in a growth position or whether they are in a static position, maintaining a sensible cash flow is absolutely key. I think that is exactly what invoice finance does to support that. It has actually taken some of the stress and strain away from making sure that you’ve got availability of funds on a day-to-day basis.”
Gribbon seconds Wiltshire’s take on the advantages for SMEs in taking out invoice finance, adding: “It’s about getting working capital. In many cases, those debtors can take quite a long time to pay.
“What we do is we free up to about 90% of the value of those debtors, which allows them to do other things, grow that bit more quickly, carry that bit more stock, fund greater sales. The real benefit of invoice finance is that it will grow with the business. So as the business grows and its sales line grows, the invoice finance line will grow with it. If businesses are growing, it is a really beneficial solution to some working capital issues.”
Challenges
All sectors face their challenges, and Chesham echoes Gribbon’s observation about the proliferation of competition in the sector. “In my lifetime, I do not think there has been a better or easier time to borrow money. From an SME point of view, with so many different types of funding available from so many different funders, the challenge is knowing which route to go down. That is where the role of the introducer is key, to make sure the client takes out the right type of funding and secures it against the relevant asset.”
Future economic turbulence is always hard to predict, something that is compounded over the UK’s upcoming, and already twice-delayed, departure from the EU.
“For SMEs and the even larger corporates out there, they know what is going to happen, but they don’t know when or what that means to them. Planning for that is very difficult, and I empathise with our clients and our prospects,” says Gribbon.
Nearly half (44%) of UK SMEs, roughly 2.5 million businesses, are struggling with cashflow as they attempt to prepare for Brexit, according to a report from BFS. Its latest SME Confidence Tracker from the second quarter of this year, almost a third (29%) of SMEs are now actively using funding, up from 23% in the first quarter.
On the issue of Brexit, Wiltshire says: “The [Brexit deadline] 31 October is looming ever closer. In the run-up to the previous deadline, a lot of SME businesses started to stockpile just in case things were very different. BFS has not necessarily seen that ramp up to the same levels as yet, but there is still very much that possibility.”
Risk Assessment
With the collapse of infrastructure company Carillion, it was revealed that a third of Carillion’s £1.5bn debt to banking partners was made up of ‘reverse factoring’, or supply chain finance facilities.
Among major institutions, RBS, Barclays, HSBC, Lloyds and Santander UK were owed around 60% of the construction’s company debt. With the potential of such exposure on the books, invoice finance providers have always had to proceed with a level of caution.
Chesham says: “Positive Cashflow Finance, and the invoice finance industry as a whole, have always focused on the strength of the client’s customers. Ultimately, it is those customers’ ability to settle the invoices that we fund that keeps us secure.
“Ideally, SMEs will have a spread of customers, which consolidates the risk, but obviously that’s not always the way. In the case of Carillion, the industry knew the business had problems. The insurance markets had stopped underwriting credit, so most invoice finance providers had stopped providing funding against it.”
Diving deeper into the risk-assessment process on a more general level, Gibbon adds: “STB assesses the quality of the debtor. This would involve looking at what their credit standing is, and seeing what their payment performance has been.
“In some cases, STB will firstly request that credit insurance is in place. This is an effective instrument businesses have available to them in order to protect against failure of larger debtors.
“Another point of assessment is the contracts that are in place between the client at the debtor, in particular what larger companies might use in that contract to avoid payment in the event of client failure or failure to complete a contract. There is a judgement on not only the quality of the debtor but the quality of the debt that has been created.”
Interconnection
Providing invoice finance for SMEs can offer an insight into the business and the equipment they require, offering a potential opportunity to provide finance for other areas of the business as well. It is also so often beneficial to have prior experience with customers to ensure their reliability moving forward.
Chesham says: “Providing our clients with more than just invoice finance is an area we are looking to develop. As a group, 1pm provides funding against a wide array of assets within a business through our varied funding portfolio. Now that Positive Cashflow Finance is part of a larger group, it can provide the majority of funding solutions that an SME owner is looking for.”
Technology
Technology has radically transformed the invoice finance sector. In July this year, London-based fintech startup Hokodo was awarded a €2m grant by Horizon 2020, the funding programme for research and innovation run by the European Commission.
Awarded to Hokodo’s French office, the funding will enable the launch of the business’s API-based invoice insurance offering in Europe, which it says could potentially protect millions of SMEs from unpaid invoices.
Wiltshire says: “I’ve been in the industry for donkey’s years, and the amount of technological advancement that I’ve seen over the last three decades has been absolutely phenomenal. Invoice finance is changing minute by minute, day by day, and there’s a lot more that the industry can do to offer a better service in terms of stronger access to cash and a system with stronger and more varied lines of communication.”
Gribbon looks even further into the future, adding: “I don’t think mass technological advancement has really reached the sector yet. Around the edges of it there are people working with extraction tools, getting data direct from clients and client systems. Blockchain may provide all sorts of solutions in this sector because of the way that the audit trail can be pinned down. That’s a great thing for clients and for invoice finance businesses.”
Regulation
Late payments, and the stress this can cause to SMEs for myriad reasons, has led to demands for government intervention to prevent their growth.
In June, the UK government proposed new powers for the small business commissioner to tackle late payments through fines and binding payment plans, company boards to be held accountable for supply chain payment practices for the first time, and a fund to encourage businesses to use technology to simplify invoicing, payment and credit management.
However, the measures were criticised for a perceived lack of impact on the issue by organisations including the National Federation of Builders and the Association of Accounting Technicians.
Chesham notes: “The regulation is already there; the issue is that it is not enforced. The problem you have is that the SME owner is worried about enforcing late payment surcharges – which may be built into the terms and conditions – because, ultimately, they do not want to lose that big account. Instead, they are entering extended payment terms with suppliers, which prevents a healthy cash flow.
“I don’t think it needs additional regulation because the current regulations aren’t being enforced. Instead, the existing regulation could be reviewed to see whether it is practical and enforceable and if not, how it could be improved.”
Wiltshire adds: “I think there needs to be a greater awareness. I don’t necessarily know that every SME in the land is aware of some of the governance that surrounds late payments, some of the things that have already been done to address it, or what they can do. They are really suffering from one of their customers continually paying late.
“For these things, it’s how well it’s put out there in the market as opposed to there not being enough out there. We’ve had quite a lot of action, but it’s getting those actions out there so people can know what they can use to help them deal with that issue.”
Taking an alternative look at the issue of late payments themselves, Gribbon says: “I would question whether there is a late payment culture. Some of the big businesses do find reasons not to pay, but often the reasons for non-payment are because clients haven’t provided the right data; they make it very difficult for them.
“For certain sectors it’s worse than others – for example, construction. Yet when you look at the average payment cycle in the UK, it is 55-60 days from issuing the invoice to receiving payment. If you compare that against most countries, that is pretty quick.”
Conclusion
Invoice finance as a sector is a necessity for SMEs across Europe – not, perhaps, as a tool of first resort, but one that can provide much-needed capital in the event of other businesses dragging their feet.
With the invariable power imbalance of larger companies, late payments are not necessarily an issue that is going to go away any time soon. The focus now must be on how invoice finance companies interact with businesses seeking finance, and the need to provide the aforementioned capital moving forward into an uncertain era.
