Can Invoice Financing Solve the SME Debt Problem?

Late payments and poor cash flow management is forcing small businesses deeper into debt. Can invoice financing offer a way out? Small businesses in the UK and across Europe face an unequal financial proposition. On the one hand they are finding it more difficult to secure prompt payment from their clients, but on the other their own financial liabilities will not wait. Despite legislation, the growing culture of late payments is storing up a debt crisis for SMEs. The question is: how will they force their way out of it? Many are turning to structures such as invoice finance to help with SME debt problems.

A Culture of Late Payments for SME’s

SME Debt problems

SME debt problems can make life hard for a small business.

Recent research suggests 76% of SMEs had been forced to write off bad debts. Last year the Federation of Small Businesses warned that the culture of late payments was bad and getting worse. Their research found that 84% of firms said they had been paid late with around 33% saying that at least one in four payments arrived later than had been agreed.   

Just as worrying was that 37% said payment terms were lengthening while only 4% said they were getting better. This trend flies in the face of moves both within the UK and across Europe to improve payment terms for small businesses. The EU’s Late Payment Directive states invoices should have a maximum payment term of 60 days. Here in the UK, the government has brought that down to 30 days.

If payments take longer, businesses can levy late payment penalties and charge interest. Unfortunately, this seems to be having little effect in the real world. Businesses routinely report being asked to advance terms of more than 90 days.    

Cashflow Crisis

Late payments make it difficult for businesses to manage their cashflow and this, in itself, can add to their expenses in a number of ways. Missed payments can harm their credit rating, making it more difficult and costlier to access loans. They can harm their relations with their own suppliers which will damage their chances of securing positive payment terms.

The biggest concern is that problems with cashflow may cause an otherwise healthy company to go out of business and this is happening more and more frequently. Estimates suggest the UK economy loses £2.4bn annually thanks to late payments. To cover the gap, many will apply for business loans, but these can serve to force them even deeper into debt. Invoice Finance can help your SME with its debt problems by advancing cash against invoices, hopefully before it gets to a stage of enters going in to liquidation

Invoice Financing Companies

The solution to this problem is not easy, but many SME ‘s are turning to an alternative form of financing known as invoice financing to help with debt problems. You might also have heard of this referred to as invoice factoring as it’s a good way to secure a cash injection without taking out another loan.

In its simplest form, invoice finance involves selling off a portion of your unpaid invoices. Its value is that it can unblock your cashflow and get money coming in to cover all your financial liabilities. It’s particularly useful for businesses which sell to other businesses and often have lengthy payment terms.

For example, businesses selling to the public sector see it as a good way to counteract the government’s notoriously slow payment processes.

It works simply. A factoring company can advance you a portion of the money locked up in your unpaid invoices. This will typically be around 70-80% of the overall total. They will then take responsibility for the management of your ledger which includes chasing all outstanding invoices. When the invoice is paid, they return the remaining sum to you minus their fees.

These can be a little complex. Costs come through factoring fees which is the charge for releasing the money to you. This is normally paid weekly or monthly and will be anywhere between 0.5% and 5% of the total invoice sum. Larger sums will generally be towards the lower end of this price range with smaller invoices being towards the top.

The cost will also depend on how quickly your customer settles the invoice. So, let’s imagine you have an invoice for 2,000. The invoice factor company agrees to advance 80% of that total, so you have £1,600 in your account immediately. They then levy a factor charge of 3% per month. Assuming the invoice is paid within 30 days, the cost of factoring the invoice will be £60, and you’ll receive the remaining £340. If they take longer to settle the cost will rise.

This does mean sacrificing a portion of each of your invoices, so you should only enter into it if you have a clear idea of how much it will cost. However, it can take the pressure off and allow you to concentrate on other things. You don’t need a good credit score to qualify and it won’t involve taking on more debt. So, if your firm is struggling, invoice factoring is well worth considering.

Business Cashflow Solutions

If you feel that your SME is having debt problems due to slow payers we can source business cashflow funding. Invoice Finding are one of the UK’s leading Invoice Finance Brokers for SME ‘s with Debt Problems. We understand that businesses have issues with cashflow due to slow payers.

Since we started trading in 2010 invoice Funding have helped over 1000 business, over half are SME ‘s with Debt Problems. We are always happy to help businesses with these issues. Should you require more information, simply complete the online enquiry.

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2019-09-08T14:01:56+00:00