The European Central Bank (ECB) said recently that it was harder for firms to borrow from the banks in the third quarter of last year. The bank also expressed concerns that tougher bank capital requirements via Basel III will lead to more difficult credit conditions.
One of the lessons from the financial crisis was that there was an overreliance on bank financing, which only reinforced the liquidity drought when conditions rapidly tightened. That is why, more than ever, it is essential for growing businesses to have access to funding from a wide variety of funding providers.
The market has evolved significantly since the economic downturn, and alternative models are far more prominent now than they have ever been in the past. Existing non-bank providers are creating new products and services, with a real focus on transparency of fees, excellent customer service and speed of funding.
Different forms of funding have been springing up. Peer-to-peer lending (P2P), crowd funding, online platforms matching borrowers to lenders – a funding revolution has begun that is in many ways intimately bound up with the power and reach of the internet.
These are all encouraging signs; a diverse market is a healthy one. There is a growing realisation among small and medium-sized companies that there are far more options out there than merely taking out a bank loan or negotiating an overdraft.
But much more needs to be done. While awareness is growing, it is still not high enough and traditional bank financing remains the default position. This may always be the case, but more businesses need to look at the alternatives and realise that there is scope for them to introduce other forms of finance into the mix alongside bank products.
Making Businesses More Aware
There are some 45,000 businesses in the UK using invoice finance – but over 400,000 may be suitable for it.
There is an onus here on the funders and professional partners to make businesses more aware. They need to take time to understand customers’ needs and make the right solutions available to them.
The sector needs to evolve so that it becomes less about what products are on offer and more about how funders develop offerings that match what businesses are really looking for.
This is a global issue and not a problem that is confined to a small minority of countries. Recently the SME Finance Forum, part of the G20’s Global Partnership for Financial Inclusion, said in a report that “the [small and medium enterprise (SME)] finance gap remains large…with access to credit the biggest problem.”
Funders need to work together to influence policymakers across the world about the importance of new forms of funding being available to SMEs.
Invoice finance has a key role to play. Bibby Financial Services, established in 1985, saw its global client numbers increase by 90% between 2007 and 2012. Bibby now has over 7,000 business customers throughout Europe, the Americas and Asia Pacific with total global debts factored of £8bn.
One of the great strengths of invoice finance is that although it is seen as an ‘alternative’ funding method, it has actually been around for many decades and is therefore tried and tested. Indeed, the banks themselves routinely offer it in addition to their other products. So it is in fact a mainstream product but one which is still thought of as alternative because it is less well known than loans and overdrafts. It is a flexible funding product that can be matched to a company’s specific profile and needs.
In addition, as the economy shows signs of picking up around the world, many companies may be keen to bolster the export side of their businesses. But with large variations from country-to-country over credit terms, a conflicting payment landscape can be a real barrier to SMEs that prevents them from maximising export opportunities.
Invoice finance can play a significant role here, helping companies to manage these difficulties with greater confidence.
What’s more, invoice finance is based around having a real knowledge of the customer.
But in many ways, actions speak louder than words. Funders will only convince businesses of the value of alternative financing if they keep on delivering great services to customers. They need to show that alternative finance models really work.
The evidence is already there. For example, a recent survey by the UK’s Asset Based Finance Association (ABFA) found that 86% of customers were very or fairly satisfied. Meanwhile, the UK Customer Service Index put SME satisfaction with banking at only 30%.
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