By Steve Box, Chairman of Accelerated Payments
On 4th July, the great reopening will reach its next stage. Restaurants and pubs open their doors to the public. Whether we will see a trickle, or a flood of customers remains to be seen, however, those further up the supply chain, will invariably be hoping for the latter. Preparation has already begun in earnest. Shelves are being restocked, orders placed, and cleaners hired. While all the attention is on the return of public facing SMEs such as pubs and restaurants, the success of their reopening will heavily depend on their suppliers and service providers. After three months of no trade, cash flow for suppliers is tight and being stretched further. Without financial support, for many the next month will be make or break. The real question now is where will these businesses turn?
Banks are in preservation mode, focusing even more on retaining existing rather than onboarding new customers. They will be a part of the mix undoubtedly, but small businesses cannot rely on support from the high street banks. If these businesses are to rebuild their cashflow to enable them to trade through this next phase, the funding gap left by the high streets will have to be overcome.
Working capital needs are being filled by alternative finance – the new players who are far more nimble and have a greater focus on clients – who have the products and technological capacity to meet businesses’ needs of today and in the future. Looking more specifically at invoice financing, since the crisis began there has been huge growth in this sector across the UK. With liquidity in short supply and businesses facing unprecedented cashflow challenges, you can see why some SMEs began looking for faster access to locked up working capital.
Granted, invoice finance providers have been gaining market share for some time in the UK, however, in recent months some have emerged as the most capable of helping businesses trade through the pandemic and, as a result, began appealing to a wider audience than before the crisis. I know that not all invoice finance companies adjusted as well, but some seized the opportunity to double down on their offering and widen the net.
In my view, the concept that some companies can fund as little as one invoice or even a single buyer or a selective number of buyers is what has been so important to SMEs during this crisis.
If you consider a recruitment agency that needs to hire or scale -up to meet a different form of demand, they may not want to get tied into additional long-term loans. The appeal of simply securing financing on one invoice and having the confidence that it is being repaid, with all the uncertainty brought about by COVID, is strong. Also, many of their customers are only reopening on the 4th July, so they likely do not have a long list of invoices yet that they can discount for immediate cash. Some may only have one strong invoice and require capital on its strength to get through this period.
The model can be even more SME friendly as, some invoice financing companies evaluate if they can fund the invoice on the strength of the debtor not creditor. The debtor is often a much larger company with a strong credit history, and that is how the model works for both parties. This is hugely important for any SME now as they may have a large customer but not balance sheet. With that one change to lending criteria, you are removing all the rigorous background checks on the financial health of the business and supporting the SME on the strength of their customer alone.
Also, by allowing the SME to choose the invoice or buyer(s) that they wish to finance, the invoice financier does not require a full oversight of turnover, and so it becomes more selective, and, as a result, cheaper, and businesses are wrapping a variety of charges into a simple to understand fee per invoice value discounted. That transparency and knowing what you are getting for your money, rather than having a range of add on costs, is very commendable. It is likely that we will see more and more traction in that direction.
Technology has played a significant role in propelling this industry forward. Many invoice finance companies use their more advanced technology to assess the viability of the invoice and give a decision and provide funding, often within 48 hours. For businesses, the speed element is critical: having access to working capital quickly is a game-changer for SMEs right now. If you consider the requirements of a cleaning company that needs to acquire new equipment for its staff to work in the current conditions, it would be a long-drawn-out and expensive process to get the funding needed from a traditional bank for such a cost. If an invoice financing company can provide funding within a couple of days or less, it can transform the speed at which a business is able to make decisions. While most invoice finance companies use the technology solely to assess an application, I’m delighted that Accelerated Payments takes this to the next level by using human oversight in addition as they find algorithms can, at times, misjudge the validity of an application. I think this is the direction of travel – fintechs mixing technology with the real, human experts.
The shift to invoice financing is not solely reserved for the UK market either, in fact, we have seen a worldwide move in this direction over recent months. Manufacturers, professional services companies, and service providers are encountering the same challenges across the globe. I do not see this trend changing either as, along with the current market uncertainty posed by the global pandemic, Brexit and the restructuring of trade agreements will ignite challenges and funding considerations for exporting businesses that traditional lenders just cannot solve alone.
The emergence of fintech lenders and invoice financing for the SME landscape was inevitable. The investor-driven approach to these companies has led to more agile businesses that can think and forward plan, rather than have legacy systems and exacting procedures holding them back. However, regardless of how the trajectory continues, the alternative market is never going to be fully separated from the traditional lender, as it depends on either backers, like banks, or other institutions to support the journey.
So, while this projection may have been inevitable, will we look back over the period of COVID-19 and think it was a catalyst for growth for the alternative finance sector – perhaps.