A recent roundtable discussion saw participants from the invoice factoring, commercial finance and accountancy fields pointing to a lack of flexibility, an overtly ‘risk averse’ approach from traditional lenders and lack of understanding amongst businesses as being key obstacles to SMEs funding growth.
Witold Chojnowski of KPMG argued that while banks ‘have got the money (to lend)’, they are reluctant to unlock funds to assist start-ups and entrepreneurs.
‘That’s where the risk is,” he stated. ‘Distressed investors might say: ‘you’ve got a good idea, here’s £100,000, go for it.’ Will the banks do that? I’m not so sure.’
Glenn Blackman, director of invoice factoring brokerage Cashflow Acceleration, pointed to research carried out by the Federation of Small Businesses (FSB) saying that ‘Some 42 per cent of credit applications are unsuccessful,’ meaning that a sizeable proportion of companies are seeking (but failing) to access funds for growth.
Having therefore agreed that unwillingness on the part of traditional financiers to lend to smaller businesses is contributing to the problem, the panel looked into alternative ways for these businesses to unlock funds.
Blackman highlighted the increasingly popular avenue associated with invoice factoring, with companies able to typically raise up to 90 per cent of the value of their outstanding invoices, saying that businesses can ‘release extra money for their cash flow’ in this way. Highlighted as a much more sustainable way to raise funding, the panel were in agreement as to the viability of alternative methods such as invoice financing for small businesses.
Research published by ABN AMRO Commercial Finance that was timed to coincide with the roundtable found that 34 per cent of businesses have lost faith in traditional sources of finance. Factoring companies such as these have reported an increased appetite for their services in light of a more cautious appetite to traditional lending.
Whilst the panel discussed numerous benefits surrounding invoice factoring and the more traditional asset based lending route, they also raised the concern that a lack of understanding amongst businesses towards these funding options meant that they weren’t actively seeking them as much as they should be.
‘The trouble is that people don’t know about (ABL),’ explained Blackman. ‘I could point you towards a market of lenders hungry to lend, but it’s about putting (them and the borrower) together.’
The Asset Based Finance Association, or ABFA, has conducted its own research, stating that funding can be as high as 43 per cent of a business’ debt with these kinds of methods. Research carried out by Cashflow Acceleration found the figure to be just 3 per cent with traditional overdrafts. It would appear however that a lack of awareness and understanding is the defining factor at work, Blackman backing this up by stating that ‘(businesses) tend to turn to their bank or accountant as the first port of call.’
In conclusion, the group agreed with the notion that it would take a widespread education and awareness drive, something which could potentially be initiated by the government and invoice factoring trade bodies.