It’s now more than seven years since the onset of the financial crisis precipitated an economic disaster resulting in a double-dip recession from which most parts of the economy are still recovering.
Small businesses, of course, were far from immune from the icy winds of recession and have tended to suffer more than most. Even with the economy now picking up, finance has been notoriously hard to access, especially for new businesses. Today small businesses are more likely to be turned down for new credit lines than they are to be accepted. Figures from BDRC’s SME Finance Monitor show that it’s actually harder to get new business finance from banks now than it was at the height of the economic turmoil in 2008 and 2009.
In this context the increasing use of invoice finance since the start of the crisis should come as no surprise. With banks less amenable to offering loans and overdrafts to small businesses, businesses were bound to look to other models of lending to provide the finance they need. Since the end of 2007, the sales of invoice finance clients have risen by over 40 per cent, and advances against sales by 15 per cent. The UK is home to the biggest and fastest growing invoice finance market in the world.
Invoice finance has existed in the UK for centuries. It was one of the earliest products offered by the first established banks in London. Today the market is still dominated by the large banks alongside a small handful of private players. The practices of invoice finance providers are unregulated in the UK, despite the size and growth of the industry.
Bad practice is widespread. We speak to businesses on a regular basis who have had their fingers burnt by long contracts, hidden fees and high break clauses. We speak with businesses drawing down less than £50k a quarter for which the invoice finance provider has taken security over £3m of assets. We work with one business which paid a £100k fee to leave its existing facility, so bad was the service it was receiving.
The invoice finance industry has become one in which the borrower’s best interests are not being sufficiently considered. As a result, in many circles invoice finance has a bad name. It’s reputation is of a product that only a desperate business will turn to.
In the long run this approach to business lending won’t pay off and it’s a great shame that businesses will be turned off from raising finance against outstanding invoices.
We are now moving into a period of sustained economic growth – a period of opportunity for new businesses to grow, hire more staff, launch new products and compete in new markets. Businesses that are tied into restrictive long-term contracts, paying over-the-odds for their finance are not going to be able to take advantage of these opportunities.
Invoice finance can help business seeking to super-charge their growth, but not in its traditional format.
The UK is now largely a service-based economy – not many of us actually make things any more. Whether that’s a good direction for our economy is a debate for another day, but we must deal with the reality in front of us. Service companies tend not to fit a mould that banks want to lend to. Banks want security, no matter what product they’re offering. Even a large, successful graphic designer – for example – might have very few tangible assets a bank can take security over. The products of these service companies are often just time and talented people.
Today’s businesses need finance products that know and understand the value and prospects of the business beyond what security they can put up against a loan.
Pay-as-you-go style services for invoice finance – such as MarketInvoice – are growing rapidly and experiencing significant repeat usage from business borrowers. A big part of the success of these models is the lack of security required. The invoice itself is sufficient. Without long contracts or complex fees the borrower is free to take their custom elsewhere, so the finance provider is incentivised to provide a top quality service on a regular basis.
It is a rethink of the centuries old model that reflects how business is conducted in a modern, digital economy.
Recent years have seen many industries turned on their heads by new technologies. From travel and tourism, to music, to publishing – new dominant market leaders have ousted household names. For the most part the end customer has benefited – from a better range of holiday options, to easier access to music, to cheaper books. In the same way businesses will benefit from an invoice finance market re-shaped by technology, and it will be those finance providers that focus clearly on delivering excellent service and value that will be the leaders of tomorrow.
For their part, businesses must not accept second rate service or products from a bank. This is the time to make your business a success, don’t let anyone hold you back.
Co-Founder of MarketFinance