Ian Duffy

By Ian Duffy, CEO of Accelerated Payments

SMEs have always struggled with cash flow challenges, but COVID-19 has taken matters to a completely different level – leading to unprecedented disruptions to growth and operations.

The government has stepped up to provide support measures – such as Bounce Back loans, which have kept 1.3 million UK businesses afloat and the Coronavirus Business Interruption Loan Scheme.  But these are short-term fixes that will eventually end, leaving many companies searching for other means for support.

Where can they turn for help?

Getting assistance from banks is already tough for SMEs as they just aren’t big enough to appeal from a lending and investment perspective, and banks usually prioritise loans (now in some instances with a government guarantee) for SMEs that are a better credit risk. This disqualifies many SMEs who, for various reasons including the COVID pandemic, have sub optimum credit risk profiles. There’s other alternative lenders or credit brokers, but you have to watch out for additional requirements (such as personal guarantees) and borrowing limits – and SMEs aren’t necessarily protected if things don’t work out.

With these avenues offering no route to business support, more companies are turning to invoice financing. They include micro businesses supplying larger companies as well as mid sized enterprises marching ahead with global ambitions.

This external source of capital has been around for a while and is aimed at SMEs that supply customers that are slow payers but a good credit risk.

At the start of the year, one survey revealed that UK businesses were chasing more than £50bn worth of late payments before the pandemic hit, with the average small business chasing five outstanding invoices at once, wasting an hour and a half every day.  COVID-19 has irrevocably made matters worse – making it all the more crucial for businesses to get working capital support quickly and efficiently to avoid a collapse of their operations – which, otherwise would still manage to grow and scale.

Invoice financing: a lifeline for businesses

Invoice financing – or invoice discounting – allows companies to draw advances against unpaid invoices that a client owes a business in a process that is transparent, reliable, straightforward and quick.

What happens is an invoice financing company buys a newly issued invoice from a suppler and typically pays 80% plus of the value of the invoice upfront to the SME. When the invoice is paid by the buyer, the SME receives the balance of the invoice amount less an agreed fee (or discount, hence the name).

This financing option allows businesses to get paid most of the amount due from a buyer within days of issuing invoices ensuring they always have money in their coffers so they manage their cash flow effectively.

We’ve seen a few trends emerge during the pandemic, which makes me hopeful and proves that – with the right support – a lot of businesses can still manage to grow and scale even during a pandemic.

These trends include an increase in exports to countries outside the EU as well as larger invoice sizes and longer payment terms.

Expanding Outside the Domestic Markets

Pre-COVID, a reasonable percentage of our business was export related and what seemed reasonably straightforward transactions such as with Carrefour, France or Walmart, US – nothing too far outside the box. However In the last few weeks we have seen a significant increase in funding requests for both established markets as well as new markets outside of the EU and USA.

Businesses are looking for invoice finance to help them sell to growing markets such as the US, Canada, India, Australia, the Far East, and other more exotic countries. Many exporters are making the sensible decision to source these new markets now before the upheaval of any potential ‘No deal’ with Brexit. To support those debtors, we are working closely with government initiatives including UKEF to ensure that we can put credit insurance in place particularly in locations where the private credit insurance market struggles.

Earlier Conversations: The time is now

Some mid-sized and larger businesses have approached invoice financing from an opposite direction. They are looking to manage/extend credit terms with both existing and new suppliers while ensuring that suppliers to the particular company have access to invoice financing facilities.

COVID has also had an impact at the point at which we speak to clients. Businesses used to come to us with invoices that were raised a couple of weeks back; now, because the focus has shifted to an agile supply chain and ensuring that you have resilience, there’s a good pipeline of businesses that are ahead of the game and looking to fund future orders.

Businesses are being proactive rather than reactive – which inevitably makes things easier for invoice finance providers, because they can ensure that all of the procedures and processes have been put in place including setting up the correct bank trust accounts.