Simon Carter (Director of Touch Financial) asserts the importance of alternative forms of finance like invoice finance in supporting economic recovery.
We Have Lift Off
The UK’s economy has been changing as quickly as the weather in the last few weeks but, unlike the autumn skies, the economic outlook appears to be growing brighter.
Hot on the heels of the Bank of England’s recent ‘forward guidance’ plan (in which interest rates are pegged at 0.5% until the employment rate declines to 7%) is the positive but unexpected news that the national employment rate has dropped to 7.7% from May to July, from 7.8% in the preceding three months. Meanwhile, a survey by ManpowerGroup Solutions UK shows that 6% of employers are expecting to hire in Q4 2013 (up from 5% three months prior).
This projection is already being realised in some sectors. Automotive company Jaguar Land Rover PLC has announced plans to create 1,700 jobs at its Solihull plant. This expansion, part of a £1.5 investment plan to expand the company’s product range, shows remarkable confidence in the economy.
How Does Asset-Based Lending Factor In?
How does asset-based lending factor (pun intended) into economic growth? The Asset Based Finance Association (ABFA)’s newest quarterly report for Q2 2013 shows more confidence from asset based lenders, who have increased advances made to customers by circa 10% at the end of Q2 2013 compared to Q2 a year ago.
Clients of the lenders in the asset based lending sector saw a 12% increase in sales in the last quarter (again, compared to Q2 a year ago). Although the figures do not show a direct relation between the two, it may be inferred that businesses that sought invoice finance during the period may have seen an increase in sales as a result, or that businesses that saw an increase in sales have opted for invoice finance to further facilitate growth.
These results suggest a sizeable boost for asset based lending. Delving deeper into them, however, it is interesting to note that the 10% in growth of invoice finance advances does not correlate with the 12% sales growth experienced by clients on the whole. I would suggest that the 2% discrepancy comes from firms that are not fully drawing funds from their invoice finance facilities – these are likely larger firms that may not have such a need for additional working capital. Furthermore, 76% of the funds advanced went to 17% of clients of lenders surveyed, all with a turnover of £5m or more.
Given that domestic Factoring saw a 1% decline in number of clients, the growth in the invoice finance market is clearly in invoice discounting facilities, which have seen a 2% increase in client numbers. This reflects a market where the customer has more choice, with some lenders becoming more aggressive about market expansion by focusing on customer satisfaction and choice. Customers continue to show a preference for confidential solutions over fully-disclosed ones as a result.
Whether or not the outlook for invoice finance is improving generally, my view is that, at the smaller-SME end of the client base spectrum, businesses are still looking for better working capital solutions than that provided by traditional bank lending. These latest figures from the ABFA are encouraging but certainly not mind blowing! There has been a great opportunity in the last few years to really expand this sector, but self promotion is one aspect which I don’t think has been particularly well done, and simplification of process and products has been slow with some lenders doing what they have always done rather than looking at market expansion by doing things differently. There are many reasons for this (which would make up another article on their own), but a good starting point would be more in the way of attachment to government funding initiatives of which I see very little. With this in mind, I would call the outlook promising rather than bright right now.
Invoice Finance As A Vital Contributor to Economic Growth
It may seem obvious for me to conclude that invoice finance is a vital contributor in economic recovery, but the facts speak for themselves. Businesses look to invoice finance for two main reasons – in order to fund their cash flow, and to grow. SMEs are looking to it as a viable mode of financial support.
The SME Finance Monitor for Q2 2013 shows a decline in the popularity of traditional forms of external finance like bank loans and overdrafts (36% in Q2 2012 to 33% in Q2 2013), whereas invoice finance has been relatively steady (between 2-3% since Q1 2011). The slight increase in the latter (from 2% in Q1 2013 to 3% in Q2 2013) is still commendable, given the tough economic landscape earlier this year. However, while finance is still holding firm, there is still a long way to go before it achieves its full potential in funding UK SMEs, particularly the smaller ones.
Given that we are starting to see the first signs of economic recovery, it is crucial that businesses, particularly SMEs, get the necessary support in order to contribute to the economy. Whether this support comes from government policy, industry initiatives or increased knowledge about business funding options like invoice finance, it’s clear that we still have work cut out for us.