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Busting five myths of invoice financing

Amidst the array of challenges that SMEs in the UK face, such as securing investment, outpacing competitors and growing a customer base, the biggest obstacle to growth for 54 per cent of UK SMEs is a shortage of cash.
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The second annual C2FO Capital Outlook Survey found that 76 per cent of UK SMEs are primarily relying on cash flow from operations to sustain themselves and grow. So what about invoice financing?

The option of invoice financing, which could help to alleviate the financial burden, is subject to several misconceptions by those businesses which could benefit from it.

There is no good reason for a business to suffer from poor cash management, especially in light of the options available.

Here are the five most common invoice financing myths – busted:

Myth one:  It worries and repels customers

Clients may think that if your business is using an invoice financing solution to access cash up-front, this is a sign of financial difficulty or means that your company is high risk. In fact, an efficient and reliable invoice financing system is by no means unusual or reputationally damaging.

And as the alternative finance industry is evolving, so is the perception of invoice finance. Having once been considered a crisis management tool, it is now a smart, straightforward solution that allows for greater flexibility than traditional sources of capital such as overdrafts and loans and is widely used by high-growth businesses.

Both the Federation of Small Business and the British Chamber of Commerce have been vocal about the benefits of invoice finance. Last year the government even introduced legislation allowing small companies to be free from certain clauses preventing its use.

Research from the Asset Based Finance Association reveals that more than 44,000 businesses currently receive over £19bn of funding using invoice finance.

Myth two: Using invoice financing means persisting financial difficulty

It is naïve to assume that just because a company is large and has a strong credit history that it is immune from facing cash flow problems from time to time.

Just look at the fate of BT and the divestment of Openreach, which runs the vast majority of the country’s broadband. The loss of the division means BT has lost 60 per cent of its free cash flow in the past quarter.

Both SMEs and large companies need quick access to cash, most of the time within restrictive timeframes. In reality, negative cash flow can be a sign that a business is succeeding, as it experiences growth so rapid its supply chain struggles to keep up.

Myth three: Invoice finance contracts usually have overly complicated terms

A common worry for many SMEs is the lack of transparency when it comes to pricing within the terms of a contract. Whist some invoice finance have complex fee structures, others appreciate that onerous and longwinded clauses deflect interest from customers.

It is therefore in no one’s interest to overcomplicate. Providers are able to offer flexible, as opposed to fixed, contract terms, which are much simpler than traditional bank loan contracts.

Myth four: Once you sign up, all invoices must be financed

This is simply not true. Specialists offer a flexible solution whereby a business can pick and choose when and which invoice it wants financed.

Opting for a selective facility is ideal for businesses that require a certain amount of guaranteed cashflow each month or those companies that deal with the fluctuating demands of seasonal orders.

Myth five: It interferes with, and can sometimes jeopardise, client relationships

Invoice finance providers do not benefit from damaging relationships between a business and its customers, quite the opposite in fact.

The better the relationships, the more likely payments will be made on time. Introducing a third party into the invoice handling process does not mean that you need to permit them to have a greater role than what you require.

If confidentiality is what you seek, providers are able to accommodate being “silent partners”. Often, third party contact can actually provide neutrality and speed up the payment process.  

According to Aldermore’s Future Attitudes report, the average UK business is missing out on around £77,651 every year in missed opportunities due to a lack of finance. With so much at stake, it is vital to do your own research instead of falling foul of preconceived ideas.

Alex Fenton, founder and CEO of cash flow finance provider GapCap

Image: Shutterstock

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