Invoice finance benefits small businesses by: allowing business
growth; protecting cashflow, because late payments and increased credit
terms are no longer an issue; providing an alternative to overdrafts and
loans that can be difficult to secure at appropriate levels.
This can be seen with two of the fastest-growing industries using
invoice finance today. The construction industry has enjoyed an increase
of 138% for construction businesses taking up invoice finance from 2007
to 2012, particularly affecting small builders' firms who find it most
difficult to secure an overdraft at the levels they need. The
manufacturing industry has seen a similar increase in adopters of
invoice finance, with an increase of 120% from 2007 to 2012. So why are
these industries choosing to take invoice finance as their funding
solution?
Invoice finance is flexible; it requires little collateral and takes
into account that customers do not always pay invoices on the date of
the invoice’s creation. These are especially pertinent reasons for the
construction industry, because these businesses are often paid 60 to 90
days after the job is complete.
Invoice finance provides them with a cash advance of any invoices
created. By allowing the business to fund projects with the money they
would have previously only secured once the job is complete, they can
now pay costs such as wages and purchase raw materials, which are
required throughout a project’s lifetime.
Banks are unwilling to lend to what is often seen as a risky industry
for late and non-payments. This is probably due to construction
projects being easily halted by problems such as bad weather, or simply
because the job has not been finished to the customer’s satisfaction.
These problems can be seriously harmful to cashflow, because the banks
are looking predominantly at historical financial data to assess whether
a business (particularly a small business or startup) is worth lending
to.
Construction businesses that are turning a corner and are in fact
profitable, have responded to this by seeking out alternative forms of
finance – invoice finance, where funding is judged on the future income of a business rather than its historical records.
Two other extremely popular adopters of invoice finance, according to data from Touch Financial,
are recruitment businesses and those in wholesale and distribution.
Wholesale and distribution often suffer from late payments, and the
nature of the wholesale business means they need a quick stock
turnaround in order to maximise income and profits. In no other industry
does time mean money more than in wholesale, and invoice finance allows
protection against late payment, while strengthening cashflow to allow
the purchase of further stock as quickly as possible. This gives the
safety and flexibility smaller businesses benefit from the most.
Recruitment is a sector where invoice finance also appears to be
thriving. Contractors often require payment before the customers settle
their bills and invoice finance provides the working capital to achieve
this. Recruitment companies often have few high-value assets, which
makes securing a bank loan or overdraft difficult, particularly earlier
on in the business’s life. Invoice finance provides cash you are to
receive in the future through the invoices you generate today and
usually requires little other assets to secure - something an overdraft
cannot provide.
Late payments, poor credit history and a lack of assets are all
common reasons for small businesses being unable to grow to their full
potential. 2013 is likely to see a further increase in the amount of
construction and manufacturing sector businesses moving towards invoice
finance, while wholesale/distribution and recruitment SMEs should
continue to benefit from the flexible funding that invoice finance has
provided them throughout the years.
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