How Different Sized Businesses Access Finance

A recent survey by the British Business Bank shows that applications for bank loans made by 100,000 small businesses and worth £4bn are rejected each year by the biggest lenders. The figures show that tightening regulation has caused lenders to rein in finance available to small and medium-sized businesses. However, this cautious approach has frequently meant that sound businesses have been turned away for finance because they simply don’t fit the banks’ narrow lending criteria.

Being turned down by a high street bank doesn’t have to be the end of the line for these businesses as invoice finance, (factoring and discounting) has become a key source of working capital finance. Faced with a gap in funding post-financial crisis, SMEs have turned to invoice finance to release the value in their unpaid invoices to improve cash flow or make investments that position the business for future growth.

Raising Finance

Factoring and invoice discounting are financial services that release the funds tied up in the business’ unpaid invoices. In this way, business owners can raise finance by selling the sales ledger to a factor or invoice discounting company that advances up to 90%, and in some cases up to 100%, of the value of each invoice once they are issued to customers.

Factoring and invoice discounting facilities are typically based on the whole turnover of the business and one of the benefits of using this type of finance is that the business doesn’t have to draw down all the credit at once, but can use funds as they are needed and only pay interest on the amounts that have been drawn down, which is replenished each time a customer pays an invoice, minus a service fee and discount charge (interest).

Smaller Turnovers

Factoring has been designed for smaller businesses that operate within the business-to-business sector and have a turnover of at least £250,000. It’s a useful option for small businesses that don’t have an in-house finance team, particularly if customers aren’t always reliable when it comes to paying on time and creditworthiness is a concern.

In a factoring agreement, the factor manages credit control on behalf of the business, which means that they collect outstanding invoices and ensure they get paid whilst establishing a relationship with customers. By collecting payments on behalf of the business, business owners have more time to focus on the day-to-day running of their growing business.

Larger Turnovers

Invoice discounting is only available to more established businesses that operate within the business-to-business sector and have a turnover of at least £500,000. The business must also have a robust in-house finance team. One of the benefits of an invoice discounting agreement is that it remains confidential as the business issues its invoices, manages the customer relationships and chases payment in the normal way. Customers are unaware that an invoice discounting facility is in place.

Seasonal Sales and Revenue Fluctuations

Selective invoice finance is aimed at businesses that have seasonal sales, where the pickup in demand can put a strain on cash flow. It’s a useful option as it enables business owners to fund a single invoice at a time and also comes with bad debt protection that covers the business against non-payment. By using a selective facility, the business can improve cash flow, bridging the gap between outlay and payment.  

If you would like to know how to raise finance via invoice finance and which product is more suited to the size of your business, please call 08000 24 24 51 or email for free and confidential advice from one of our professional advisers.