A recent study by a UK business lender has revealed that invoice finance is one of the most commonly recommended sources of external funding by SME accountants. That represents a dramatic reversal of fortunes over the last decade.
Invoice finance was once considered to be a finance type of last resort, with high costs and poor service levels commonplace. However, with invoice finance and asset-based lending having risen 5 percent to £23.4bn at the end of 2017, it’s clear all that has changed.
What sources of finance do accountants recommend?
The study of 1,922 SME accountants revealed that 66 percent recommend external sources of finance, including open banking, to their clients. Although those recommendations were tailored based on the particular needs of each business, it did reveal that UK accountants were more willing to recommend some funding types than others.
Perhaps not surprisingly, just over half of the respondents (50.8 percent) said they would refer their clients to a bank if they required external funding. However, less predictable was that more than a third of accountants (36.3 percent) said they would recommend an invoice finance provider ahead of a revenue based loan or any other types of business loan.
Some of the accountants canvassed said they do not currently recommend external funding to their clients at all. The main reason they gave for their reluctance was a lack of understanding of the different finance options. Some said sourcing appropriate finance took too much time and created a high cost burden, while others did not want the additional administrative stress of managing the relationship between the lender and their client.
New laws to improve access to invoice finance
Last October, the Small Business Minister Kelly Tolhurst introduced plans to allow small businesses to access invoice finance more easily. The proposals are designed to combat the restrictive contracts that are sometimes imposed by larger businesses, which can prevent smaller suppliers from assigning the rights to receive the proceeds from an invoice to a third party.
Those plans will allow smaller businesses to boost their cash-flow by raising finance against their accounts receivable within just 24 hours of invoices being issued. With some larger firms imposing payment terms of 60 or even 90 days, that will help to free up the capital many businesses need to grow.
Of course, in an ideal world, small businesses would not have to rely on invoice finance to receive the money they are owed within a reasonable timeframe. However, until the UK’s late payment crisis is solved, invoice finance continues to serve as a valuable source of short-term finance that is keeping many SMEs afloat.
The vital role invoice finance can play
Commenting on the research, Mike Smith of Business Expert, said: “These findings show that invoice finance is no longer a last resort for businesses. Not only are accountants recommending it to their clients but even the government are putting measures in place to increase access for SMEs.
“Additionally, it’s also positive to see that small business accountants are increasingly practicing forward-thinking, strategic accountancy practices and advising clients on funding options. Clearly, accountants are now acknowledging the role they have to play in helping companies meet their short-term funding needs.”