Fortunately, the government recognizes that SMEs are the backbone of the economy and critical to driving a recovery. With that in mind, a few weeks ago it was announced that an additional £5m of invoice financing would be made available to SMEs to attain business financing and managed by MarketInvoice.
While £5m might not seem like much, through invoice financing the funds can be recycled about every 45 days. It’s a solid strategy because the result becomes the equivalent of £40m being advanced to SMEs over the next 12 months.
How Invoice Financing Works
Invoice financing, also known as factoring, is a way to help small to medium sized companies improve their cash flow. Cash flow is at the heart of every business and is a particular concern for SMEs. When long-term loans are expensive or difficult to come by, SMEs rely on cash coming into the business to both survive and grow.
SMEs typically send an invoice to credit worthy customers allowing 30 days for it to be paid. Whether it’s a consumer or another business, they prefer to hold onto their money as long as they can. The result is SMEs are constantly 30 days behind in being paid for products and services that have been delivered.
Invoice financing allows SMEs to sell completed invoices to a third party business. In this case MarketInvoice. The third party purchases the invoice at a discount based on the SMEs credit history and industry tradition. The SME receives cash flow instantly and the third party makes a profit when the invoice is paid a month later.
Invoice Financing has History
Invoice financing has been around for decades and probably hundreds of years. However, it is almost always done with private money. Through the government’s Business Finance Partnership Initiative, the government is providing relatively small amounts of money that the private sector can quickly turn over multiple times a year. This should enable steady growth without a major investment by government.
Since launching in 2011, MarketInvoice has provided more than £65m in loans to UK small and medium businesses. Of that, £42m was loaned out in the past 12 months. As part of the Business Finance Partnership Initiative, approximately £87m has been invested in alternative SME financing that does not include bank loans.
The additional government investment is timed to help SMEs that continue facing a difficult lending environment. Without the Business Finance Partnership Initiative SMEs would remain in survival mode and many would most likely go under. The ability to take multiple short-term loans, should enable growth meaning more jobs and more money flowing through the economy.
With invoice financing, SMEs will continue pushing ahead. This financing is particularly intended for the fashion, retail, marketing, software, and telecommunication sectors of the economy. These SMEs will be hiring, bringing new products and services to the domestic market, as well as exporting products and services.