The required assistance for SMEs in 2013
- Thu, 24 Jan 2013
Every year small and medium-sized enterprises (SMEs) in the UK face significant challenges, with one of the most difficult elements of the running of their businesses being ensuring their clients pay on time.
Will 2013 be any different for these SMEs? Possibly.
According to invoice finance specialist Bibby Financial Services following a study conducted among 1,000 SMEs, over a third of small businesses in the UK find that 20-30% of their sales ledger is constantly overdue.
The research carried out at the end of 2012 is illustrative of the huge problems faced by SMEs when it comes to cash flow, which can make the day-to-day operations extremely challenging.
The issues of bigger businesses withholding funds payable to SMEs is not a new concept, but it is something which is starting to be challenged.
Supply Chain Finance Scheme
This is a new scheme implemented by the Government, which according to Prime Minister David Cameron could potentially ensure £20billion is made available to small businesses.
According to the new scheme, once an invoice has been approved by a larger organisation they will notify the bank. The bank is then able to extend an advance to the SME at a low interest rate, acting in the security that the invoice will be paid following the assurance from the larger organisation.
The scheme has already been taken up by organisations such as Tesco, GSK and Vodafone. It's hoped that more will follow in 2013.
Many finance specialists are on board with the new Government proposals, but until more, larger, organisations sign up, the benefits may not immediately filter down to the smaller businesses. There are however various asset based funding options to provide assistance and much-needed cash flow to these smaller businesses struggling with overdue sales ledgers, such as those offered by the factoring provider Bibby Financial Services.
Invoice finance is the most notable solution available to assist with unlocking the cash flow tied up in existing invoices.
When an invoice finance agreement is in place with a funder such as Bibby Financial Services, once an invoice is issued an agreed percentage will be provided to the business within 24 hours. With Bibby Financial Services this is up to 85%. Once the invoice is paid in full by the client, the SME will receive the remainder minus a small admin fee.
The real advantage of using a service like this is that the capital will be freed up immediately regardless of the time taken for the invoice to be paid. The funding available also increases on a structured basis with the size of the business (the more invoices issued the more funds available). This rules out the need to go into debt as is the case with business loans or business overdrafts.
SMEs choosing invoice finance can opt for a factoring service whereby the control of the sales ledger is placed in the hands of the funder, who will undertake the task of chasing the payment. This removes an extremely time-consuming task from the day-to-day operations of an SME; something which takes 28% of firms four days or more a month according to the research undertaken by Bibby Financial Services.
An invoice discounting service ensures the SME retains the control of the sales ledger. This is a popular choice amongst SMEs in the UK as it enables them to keep the invoice finance agreement confidential (there is no contact between the funder and their clients) and it also represents a cheaper option.
With various options in place for SMEs, worrying about late payment could start to become a thing of the past.