A new survey published in the last few days has highlighted the challenges faced by UK SMEs in raising finance. The survey by American Express found that 57% of UK SMEs have struggled to raise finance, and 60% of them sometimes have difficulty paying suppliers on time. As many small business owners resort temporarily to personal credit cards to bridge cashflow, this is good news for the credit card industry, AMEX included!
Whilst the survey found that just under half of SMEs were able to raise bank funding, this can be time consuming and onerous. It also leaves unaddressed the just over half of SMEs that could not raise bank funding. Because of the very broad definition of what an SME is, my guess is that most of the businesses that were able to raise bank funding were at the upper end of the size range (let’s say £25-50M turnover).
In contrast, many of the funding issues would be concentrated at the lower end of the definition (say sub-£10M). This means the problem is more acute for most businesses in the Midlands, because most Midlands businesses fall into this smaller category.
This is where the alternative finance sector is opening up the market. Because of the speed of response from many peer-to-peer platforms, this type of funding becomes more relevant when the unexpected happens. Four weeks’ notice of a cashflow requirement for an SME is typically beyond many mainstream lenders’ capabilities nowadays, which leaves many potentially exposed, and provides a reason why a credit card firm may have an interest in commenting on UK SME finances.
It is also the case that P2P is a cheaper option, whilst also being able to provide longer-term sustainable finance for a growing business. P2P also specializes in those sub-£10M turnover businesses that are finding they are being ill-served by more traditional sources of finance.
Getting the right finance is crucial for any business.
Working capital finance is particularly important as it provides the oil that makes the wheels of the business turn.
At Ludgate we’ve seen many examples of businesses being stifled and even broken, not through having a lack of funding, but through having the wrong type of finance.
Funding is not just a finance issue, but an operational issue as well. Getting it right can mean better margins, smoother relationships with suppliers, increased sales and a real competitive advantage.
For manufacturers, working capital is crucial. Whilst some may have enough cash within the business to fund their own working capital cycle, most manufacturers will be reliant on some form of borrowing.
The traditional source of this funding was the bank, usually via the provision of an overdraft. This was simple to administer and flexible and security was provided by the assets of the business rather than directors personal property. Nowadays, most banks push their customers to Invoice Finance which can be expensive and complex to manage.
Within the P2P/Direct Lending market there is an alternative. Several providers now provide non-bank overdrafts; this is a pool of cash set aside for the business to draw upon and repay as and when required. It is a very similar concept to the old bank overdraft, except it is not tied to your bank account – you simply draw upon the facility as and when, transferring to the company bank account as required.
There is no complicated reconciliation to invoices, or funding directly tied to invoices; no need to query disallowed invoices or credit notes or calculate exactly how much funding is available on a day to day basis. This makes this type of funding good for businesses who don’t quite fit the IF model, such as construction or contracting, or businesses where customers pay in stages.
Unlike invoice finance, the overall credit limit is not tied to the amount of trade debtors outstanding at any one time; lenders will take account of stock, work in progress and any other assets within the business.
For example, we recently arranged a non-bank overdraft of £600,000 for a manufacturer of complex electronics. Most customers paid in stages against defined project steps, meaning that invoice finance did not work especially well and did not maximise the amount of funding available.
Haulage firms are usually paid on credit terms by their customers, typically 90 days.
Conversely, the two major
outgoings – fuel and wages - have to be paid almost immediately. This creates a
cashflow problem – a working capital gap that is structural to the industry.
Most haulage firms are not cash rich because of the high costs of assets and
general pressured margins, so need to turn to some kind of funding to address
this working capital gap.
In the past, this would have been supplied by the companys’ bank in the form of an overdraft. This was flexible, easy to administer and cost effective. In more recent years, as banks have turned away from overdrafts, the gap has usually been plugged by invoice finance.
This is less flexible, more expensive and reduces the risk to the bank. It can also be much more complex to administer. Banks also make a lot of money from invoice finance.
Within the P2P/Direct Lending market there is an alternative.
Several providers now provide non-bank overdrafts; this is a pool of cash set aside for the business to draw upon and repay as and when required. It is a very similar concept to the old bank overdraft, except it is not tied to your bank account – you simply draw upon the facility as and when, transferring to the company bank account as required.
There is no complicated reconciliation to invoices, or funding directly tied to invoices; no need to query disallowed invoices or credit notes or calculate exactly how much funding is available on a day to day basis. This reduces the administrative burden significantly and takes some pressure off the need to invoice clients quickly.
The overdraft limit is agreed at the outset and reviewed every twelve months, just like a traditional bank overdraft.
Costs can be lower than a Full Factoring line, and can remove much of the admin work required for an Invoice Discount line.