Invoice financing a lifeline for SMEs

No small business wants to hear it, but nearly 50 per cent of start-ups fail within the first three to five years of operation. It's not surprising that people turn a deaf ear, but sadly it's a fact, and what's even sadder is that the demise is often not self-induced.

In an ideal commercial world, products are manufactured, they are offered to the market, the buyer receives the product and the producer receives the payment. It's a fairly straightforward model and one that historically has worked more often than not. The 'not' typically comes into the final part of the equation, when the producer receives the payment. Or not.

I believe that it is more of a vicious circle than a domino effect; if buyers fail to pay, producers cannot produce, there is nothing to offer to the market. A weak link, the chain breaks and before you know it, another statistic. This is, of course, a very simplistic, hand-to-mouth example, but the principles still hold true, particularly for small businesses, which have little room to manoeuvre when it comes to cash flow. It may not be a case as drastic as non-payment, it could be that the due amount is late, or even that funds are needed sooner than the agreed time between delivery and reimbursement. If an invoice allows 90 days for payment, a large order or a new client may need more immediate funds than are at the company's disposal.

Traditionally, business banking has been the first port of call to fill the stopgap. A fixed-term loan at a fixed rate of interest has been both the saviour and the sinking of many SMEs. For those resilient, responsible small businesses that have weathered, or indeed grown in the recent commercial turbulence, the options seem fewer and less favourable when it comes to releasing funds.

The banks are more wary of their lending and the businesses more wary of their borrowing. The rates are higher, the availability is lower and solid small enterprises are suffering.

At Gulf Finance, we have seen a tremendous movement towards invoice financing, where companies are assessed not just on their debts, but also their dues. Whether it is a question of growth, sustainability or survival, all businesses, small, medium or large, will have cash flow at the top of their agenda. With invoice financing, more and more companies are leveraging their debtors as assets. Achieving liquidity against what is owed is proving preferable to borrowing – and lending – against potential.

Companies that use invoice financing are advanced a percentage of their invoice value, and then when their client settles the invoice, this advance is repaid. It is by no means a brand new concept, but it has become one of the major financing options for those SMEs that need to access immediate funds.

Outstanding payments have previously been thought of as nothing more than a liability, which served little purpose other than reminding business owners that they should be doing better. The reliance on prompt payment has become greater and the need to satisfy creditors is equally as vital. Again, if there is a lapse from either the buyer or the supplier, the repercussions have been severe and the opportunities to either thrive or survive are drastically reduced.

From the lender's point of view, we need to consider the spread of the invoices and the strength of the end clients. As with any form of financing, there has to be a high degree of responsibility from both sides. With invoice financing, there is an instant plus point for the company, which has already proved that their product is in demand. For many companies, an enormous amount of capital can be tied up in outstanding invoices.

Whatever the business, the process is ongoing with a need for a steady turnover, reinvestment, fulfilling existing contracts and seeking new ones. Very few enterprises rely on a single client, but however many there are, it is vital that payment is regular and reliable in order to keep things moving.

We have many customers at Gulf Finance who come to us not in times of trouble, but in times of growth. Funding support may be most needed when there is an opportunity rather than a crisis, and invoice financing can be a far more immediate form of releasing much needed funds. A decline in business or a slump in trade is often a gradual process and one that typically gives some notice rather than a sudden impact. New openings, however, may present themselves at any time and need urgent attention and urgent action.

On a more philosophical level, many businesses also feel there is something far more satisfying about accessing funds they are due rather than those they must borrow. There is a fundamental difference between owning and owing.

- The writer is MD of Commercial Finance at Gulf Finance. The views expressed are his own

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