Our last article focused on the struggles of Small to Medium sized Enterprises (SMEs) to maintain sustainable cashflow, particularly when dealing with much larger Multinational Enterprises (MNE). We also considered cross-comparative analysis of different options of funding. When deciding on alternatives such as commercial mortgages or bank loans, our verdict lies with various forms of invoice financing. However, critics could rejoinder that we are living in exceptional times and that we should be borrowing and spending money to help boost the economy into a more lively state, following the fiscal stagnation from COVID-19. This article will be approaching the features of COVID-19 and Brexit and how the strategic elements of invoice finance make it a particularly good choice to help SMEs’ cashflow.
COVID-19, Lockdowns, and Government Schemes
Everyone is familiar with the global COVID-19 pandemic, but few are aware of the impacts the phenomena had on SME owners and invoice financing. According to UK Finance, a mere 35,000 UK companies actually make the most of invoice financing services when dealing with cash flow issues. Half of UK SMEs stated that COVID-19 had stopped customers from paying their dues on time. According to a Close Brothers barometer survey, In Ireland only 17% of companies use invoice finance, compared to 22% using an overdraft. The Central Bank of Ireland reported a sharp peak in demand for business overdrafts in the early days of the pandemic, but as the UK Government has offered various loan schemes and support packages, the demand has dropped. These packages could include the Coronavirus Business Interruption Loan Scheme (CBILS) and the Recovery Loan Scheme (RLS). These Government loan schemes provided a beneficial option to a lot of UK businesses as the lender is more likely to approve the applicant due to the UK Government backing 80% of the finance.
The RLS and CBILS had some asset-based loans available, as well as invoice discounting opportunities. Invoice discounting is one form invoice finance, happening via the purchase of invoices for payments of up to 90% of their value, and the money is distributed typically within 24 hours. However, the schemes themselves are based upon predictions of the spread of COVID-19 and whether we will be entering more lockdowns. As with any theory, the concept is only as strong as the assumptions; there is plenty of evidence to suggest that we may be heading for a third wave and another lockdown, although the Government has not made explicit preparations for such. It is always worth accessing a broker to best understand the funding and circumstances of such packages. That said, from our perspective, an unnecessary risk is not usually worth going for- particularly when there are alternatives. At best, the Government has already prepared for worst case scenarios. At worst, the SME could have cumulative loans and support packages, further complicating its cash flow. Only recently at the G7 meet at Cornwall did any official seem to recognise the potential consequence of a third wave on SMEs.
All of this suggests that a broker-organised relationship between an SME and a funder would offer the most anticipation for externalities. The COVID-19 virus has seen even the largest companies collapse; it would be hard to believe that any business model can anticipate the virus’ gyrations. So why trust a wide-spread support package when economic recoveries will clearly be uneven? Knowing your broker and talking to them in person is the safest bet; disclosing the specific needs of the SME to the broker offers a bespoke service incomparable to an indiscriminate loan. It will also get your capital in your hands very quickly—always a plus. As companies expand, a streamlined cashflow becomes more and more important. Externalities shouldn’t encourage SME owners to acquiesce control to a government unnecessarily.
Brexit and Financial Services
The financial services paid roughly 10.5% of all tax receipts in 2019, amounting to roughly £75.5bn, yet has been pushed in a corner of neglect for purposes of political gain; even the fishing industry, which returns only a fraction of that amount, has been getting funding and attention that the services are in dire need for. In fact, last month we wrote a piece on the upcoming state of the services sector in post-Brexit Britain; unfortunately, we cannot promise things have gotten better. Given our commentary regarding power imbalances between MNEs and SMEs, we can only expect that late repayments are ubiquitous across sectors; any one delay in a supply chain will ripple a time lag all the way through to the seller. Fortunately, UK based subsidiaries of EU/EEA based banks are not expected to be impacted by the effects of Brexit, according to UK Finance—but there is no way that will offset the cumulative consequences on cashflow to those familiar with the industry.
This might explain why invoice finance has been seen as the golden bullet in resolving Brexit- and COVID-induced late payments. An online panel hosted by Optimum Finance has called for increased collaboration and integration between SME owners and the UK Government, invoking invoice finance as the way to get businesses back on their feet. Off the top of my head, there are a few patent reasons why Optimum Finance might think that. Not only does invoice finance provide the funding (and a large proportion of it), it will provide counsel and expertise regarding credit control, and responsibilities to ledger management can also be delegated to the funder. This will take a significant amount of time and labour away from the SME, giving the company more freedom to strengthen personal relationships with clients and focus on more preferred operations.
There is a very clear demand for the service of invoice finance, despite not being the most popular resource for funding. It feels slightly bizarre, given the cost-benefit analysis of, say, getting a commercial bank loan compared to confidential invoice discounting; the latter comes with much more bang for your buck. That said, it can probably be chalked up to UK Government support packages available at the time combined with a reduction in trade, enticing companies away from invoice finance remedies. Nevertheless, just over the weekend, more invoice finance lenders are being accredited, indicating a renewed interest in the service. It is not surprising, then, that headlines are beginning to posit that invoice finance could very well be the perfect post-pandemic funding option. At a time when we are desperately trying to make London as attractive as possible to business operations as we redefine our country’s reputation, invoice finance-induced cash flow could be the cherry on top.
As of very recent weeks, there appears to be a growing consensus of the merits of invoice finance; the panel hosted by Optimum Finance held some of the biggest corporate players in our country who recognized under-rated benefits of different types of invoice finance. Furthermore, the practice is becoming more technology-friendly, with promising signs of efficient automation while still maintaining the interpersonal trust between brokers, enterprises, and funders. The practice circumvents problems affiliated with Government support while still offering extremely quick funding and delegation of monotonous business tasks. As larger institutions acknowledge the potential of the service, it should become progressively more mainstream. If this is something that sounds relevant to you or someone you know, feel free to get in touch with FinCred CF; there is no doubt we could help you out.