Invoice finance is a facility whereby cash is released against a business’ sales ledger. Recent statistics for the last quarter of 2011 reveal that the total advances against outstanding debt (pure invoice finance), when compared to figures 12 months ago, has risen by 12%. Clearly, based on this figure, it is fair to say that the invoice finance sector is experiencing significant growth.
Invoice finance is highly regarded as the alternative to the conventional bank overdraft. It is believed that overdrafts will become increasingly cumbersome and not as flexible as SMEs would like, hence prompting many businesses to switch to invoice finance to grow their business.
What role does the economic climate play?
It is quite evident that the UK is at risk of experiencing a double-dip recession — growth for the year 2012 is predicted at 0.4%. SMEs would always be directly affected when the economy is experiencing a slowdown or on a stall. Businesses are unable to finance fundamental functions such as payroll, day-to-day overheads and administrative costs. This explains why companies are having to lay-off workers later in the year — some struggling retailers intend to close down up to 50% of their stores.
Almost a third (32 per cent) of SMEs said the economic downturn had a major impact on their company in the past year, while crime, red tape and severe weather conditions were also cited as negative factors. In this current economic climate, businesses tend to trade on credit terms, typically 30-90 days.
Effect of the
The accountants is the key to industry growth.
Barriers to Invoice Finance Growth
- Misunderstanding of costs: This is clearly a major issue inhibiting the expansion of the invoice finance sector. Many potential customers argue that the costs are high — overestimate the costs. Some 75% of potential customers would be satisfied if the facility was less costly by an average of 19-25%.
Solution — The costs are misunderstood. Promotion of more transparent costing including an analysis of the benefits vs. cost of the facility would help.
- Little or no product awareness: Many potential customers do not fully understand the full range of invoice finance products and additional services available in the market. A market share of 25% is not sufficient enough to replace the overdraft as the main cashflow funding solution.
Solution — Promotion of the facility via marketing, government support, accountants and banks.
- Pricing differential between the forms of invoice finance: Research shows that many potential customers assume that invoice discounting should be 50% cheaper than factoring. This is because of the credit control benefit associated with factoring.
Solution — Again, promotion of crystal clear costing including the benefits of having credit control handled by the factoring broker would help.
- Need for Instant set-up and approval: Potential customers reveal that invoice finance could grow if there are online facilities to enable applications to be approved instantly.
Solution — Online quotes and more website involvement across major invoice finance companies.
- Hidden Charges: Customers are often hindered by the perception that there will be unexpected hidden costs.
Solution — Invoice finance companies could charge an ‘overall’ fee for the facility. Also, simplifying the pricing approach could also be an option.