Funding options for SMEs
What do you do when your business gets refused for finance by banks?
SMEs can often find themselves stuck between a rock and a hard place, the demand for orders coming in are immense, so business in one sense is booming, but on the other, they are almost having to shut down operations entirely because of notoriously long or overdue payment terms in contract with customers.
The 3-month standard payment terms can almost cripple a company, and with a major constraint being that banks refuse to lend and offer finance to SMEs with poor or no credit history, alternative funding options are sought after.
A business such as a manufacturer or distributor often find themselves receiving large quantities in orders, which at first glance must mean that the business is booming fruitfully. However, this is not always the case. In order for a business to be producing a high demand of products or a service, it requires day-to-day financing and a team of employees for this demand to be carried out in an organised and timely manner.
SMEs struggle to play catch up with cash flow due to the long payment cycles with its customers. After several attempts of refused lending from traditional financial institutions, SMEs are in danger of falling into a downward spiral and may have to look at unimaginable options such as selling the majority of company shares just to keep the business growing. The fear of possibly having to tell staff that the business is shutting down, has prompted SMEs to realise that they should not be forced into taking this kind of action just because they have less access to finance. According to a report from the World Bank, SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises. About half of formal SMEs don’t have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account. Overall, approximately 70% of all micro, small and medium-sized enterprises (MSMEs) in emerging markets lack access to credit.
Invoice financing as an alternative funding solution
This type of finance can be perceived as invoice funding, which uses invoices as a way for businesses to unlock cash tied up in invoices and therefore speeding up cash flow. This is done by selling invoices to a third party who will advance some of the funds the invoice is worth up front, for a cut of the invoice.
One advantage of invoice funding is that there is no additional debt incurred when using the service. While there is fixed service fee, the interest is only charged on advances that remain unfulfilled by customers. Therefore each time a customer pays their bill, the debt is repaid. Because of this, the amount you can borrow grows along with your business.
Invoice finance companies typically offer their services to companies with an annual turnover of at least £50,000, although some will consider start-ups and smaller businesses. A business can typically borrow up to 90% of the value of their invoices, depending the financing provider. Several different types of providers offer factoring or invoice discounting facilities, including banks, financial institutions, independent providers and online newcomers such as Populous World, which auctions invoices to global investors. The auction process provides invoice sellers with a range of competitive offers and bids around the globe from individual investors.
The Populous World auction model appeals to a multitude of SMEs as it means they can select which customer invoices they would raise finance on, and would only incur fees when they need to use it.
For many companies in the U.K today, invoice financing is paving the way as a new funding frontier, defining itself in the entire global lending market.
Lou Chan, Populous World
Populous World can fund individual invoices without having to finance their entire ledger. The team of funding specialists have access to a flexible solution that can meet a company’s needs, and unlock up to 95% of the value of invoices.
