This article was first published in the July/August UK edition of Accounting and Business magazine.

Late payments are one of the biggest problems facing small businesses in the UK. Last year SMEs (companies employing fewer than 250 people) were owed some £32.4bn in unpaid invoices. Earlier this year, the government cracked down on late payment by public bodies by laying down that they will have to pay contractors within 30 days. This, however, offers no help to those waiting on payments from private sector organisations.

Late payment has a significant impact on a business’s cashflow and therefore its ability to grow and, in some cases, even to survive. But it has become increasingly difficult to bridge the cashflow gap as bank loans have become hard to secure in recent years. This has led to a huge increase in alternative finance options. 

So what products are out there to help businesses whose outgoings are starting to outweigh their revenues? 

Cutting out the middleman

Peer-to-peer (P2P) lending, where individuals lend money to SMEs, is really a loan that cuts out the middleman and is particularly good if businesses need access to money quickly. It is a much faster process than bank finance: there are no meetings with bank managers, shorter approval times, and it can mostly be done online or over the phone. The fees tend to be lower too – other lenders and banks may have application fees, process fees, etc. However, the need to provide a year or more of accounts makes P2P finance less well suited to start-up businesses.

Go with the crowd

For financing start-ups, crowdfunding is a more useful option. Crowdfunding describes the practice of funding a venture by raising the money from a large number of people. It is particularly popular in the creative industry – bands, musicians, artists and filmmakers – but is also gaining traction in many other areas. The linking of a ‘crowd’ of finance providers to specific start-up businesses is typically undertaken online.

There are three types of crowdfunding: 

  • debt crowdfunding, which is similar to P2P lending, with investors receiving their money back with interest
  • donation or reward crowdfunding, where investors invest simply because they believe in the business, project or venture, and can receive small rewards such as tickets, newsletter updates, or acknowledgement in publicity materials
  • equity crowdfunding, where investors receive shares or a stake in the business. 

Quick fix

Spot factoring is another approach, and particularly suited to SMEs that are already established and growing but need access to (their own) cash quickly. In contrast to the options already described here – which may result in the company paying back a loan plus interest or having stakeholders – invoice discounting and spot factoring allow businesses to obtain cash from unpaid invoices quickly without having to wait for the client to pay. 

On paper, a business may be thriving, but in reality the money isn’t in the bank and there will be bills, expenses, employees to pay or money needed to invest in growing the business. With invoice payments usually taking between 30 and 90 days, factoring is a great option for SMEs that just can’t wait that long. 

Spot factoring might be regarded as the ultimate cashflow accelerator because that’s exactly what it is designed to do. It enables a business to use its outstanding invoices (due to be paid at some future date) and turn a portion of them into instant cash.

The process itself is simple: the business sells its product or service and issues its invoice, which will usually have standard ‘net 30 days’ terms. However, the business will probably have to wait much longer than 30 days to get paid, so it offers the invoice for sale to the spot factor or invoice discounter. If everything is in order with the invoice, the spot factor will then buy the invoice at a small discount. The business will then advise its customer that the invoice has been sold to the spot factor and direct the customer to make payment to the factor at the end of the credit period. Meanwhile, the business has gained instant cash to grow its business. This approach can be used for one invoice on a one-off basis, or multiple invoices. 

Unlike the other finance options, the process can be rapid – sometimes as little as 24 hours. There are no hidden fees, and it’s a flexible approach that allows businesses to use it as they need it. There is no contractual obligation to keep using the service. One of the huge benefits of spot factoring is the time it frees up for the business owner. Unlike P2P lending and crowdfunding, which can be time-consuming, spot factoring is a simple and quick process.

Spot factoring does not represent a loan that has to be paid back at a future date but rather the sale of an asset in the form of an account receivable evidenced by an invoice. As there is no loan, it can be classified as ‘off balance sheet’ financing – another advantage for SMEs.

Companies should assess what best suits their needs, but difficult financing terms or a ‘no’ from the bank no longer mean inevitable business failure. 

David Banfield, president of invoice financier Interface Financial Group