Late payment is an ever-growing problem for UK SMEs, and as a rough rule of thumb, a company will start to feel the strain if it is owed significantly more than 13% of turnover.
This is a good benchmark for advisers and accountants to consider when looking at clients’ financial performance. After all, no adviser likes to see a client go out of business – particularly if the reason is due to a lack of cash flow brought about by late payment of invoices, which for many is now easily preventable.
There are a number of options available to businesses to maintain healthy levels of working capital. If cash flow problems are caused by late invoice payment - current estimates put average time to payment in the UK of more than 80 days - it makes sense to use these same unpaid invoices to unlock funding, effectively turning invoices into readily accessible cash.
A note of caution is that factoring, or confidential invoice discounting, should not be used as a lifeline to save failing businesses. However, it can be a huge help in allowing successful, well-managed or growing businesses unlock working capital.
Invoice finance, whether factoring or invoice discounting, offers a simple, fast and effective way to do this. It has a number of advantages over its main rival, the traditional bank overdraft facility.
Unlike an overdraft, it cannot be withdrawn at a moment’s notice. Many small businesses have had the rug pulled from under their feet by banks withdrawing facilities and demanding repayment forcing them into administration.
Banks usually assess a company’s assets and past performance when deciding to lend. Invoice financiers tend to look at outstanding invoices and future potential. This can make the latter more attractive to small businesses, many of which are asset poor but have extensive sales orders.
There is less administration in applying for alternative finance – many providers are technology based with apps and online portals designed to offer fast turnaround approval processes and real-time access to funds. This makes it a useful tool for small business clients which need fast access to monies owed in order to grow.
Cash flow financing drastically reduces the need for in-house credit control, freeing up valuable internal resources, which can be focused more productively elsewhere such as production or sourcing new business.
Invoice finance is flexible and highly cost effective and many lenders in this fast growing sector offer many added value services in the form of advice of growth strategies.
All this goes some way to explaining why investment derived from alternative sources surged 91% from £492m in 2012 to £939m in 2013 and is still growing.
How does cash flow finance work in practice?
By using factoring or confidential invoice discounting, SMEs can immediately receive up to 90% of their invoice value and the balance is paid once the debt has been collected from the customer.
With factoring the lender takes on the responsibility of running and maintaining the sales ledger, thereby becoming an extension of their customer’s accounts department. The effect is to have access to a team of very experienced accounts staff, credit controllers and a powerful IT system.
The cost of invoice finance ranges from 0.20% to 1.50% of invoice value, depending on the workload and average invoice value. This is often a saving when weighed against the cost of a client’s present sales ledger, credit control departments and associated overheads.
Any client business with great potential currently being hampered by poor cash flow should consider how invoice finance can help them fulfil that potential.
Richard Pepler is chief executive of HH Cashflow Finance.