Alternative finance is a fast-expanding sector, increasingly offering finance options to many small and medium-sized enterprises (SMEs). Its emergence is timely, particularly as securing finance from traditional sources is becoming somewhat of an uphill struggle for this sector. Yet, alternative financiers are no longer merely filling the gaps left by more traditional financiers; they are becoming the pioneers of the digital age of small business funding.
Technology is having a significant impact on our daily lives, with developments occurring at a monumental rate. While banks in recent years have been talking about becoming digital, most of them have merely given conventional services a digital veneer and delivering them through new channels or a digital portal. Only a small minority are investing in the substantial work and resources required to re-think financial services for the digital age – not surprising, as significant change can be hard to accomplish for large, well-established organisations.
Fintech companies, on the other hand, are unencumbered by rigid organisational structures and extensive legacy systems. This means they have been able to approach the delivery of financial services from fresh angles. These alternative financiers take as their starting point the customer experience – addressing the needs of today’s digitally-savvy businesses in tailoring products and services by exploiting fast-evolving digital technology capabilities.
One such example is selective invoice finance. While in principle it can be regarded as a variant of invoice finance, in practice, it is transforming small to medium enterprise (SME) finance; creating a digital funding experience never seen before. Indeed, rather than companies having to pay to finance their entire sales ledger – and finding themselves locked in to a lengthy contract term with hefty fees – business owners can initiate specific draw-downs of funds against the pre-approved invoices of their choice.
Furthermore, they can do so exactly when they choose and for the length of time they select. For instance, they may decide to borrow against those invoices they know will be paid first; making repayments quickly and keeping costs low. Such a degree of flexibility, convenience and control provides significant benefits, and these “on demand” funding capabilities are bringing SME finance firmly into the digital era.
The key to unlocking on demand business finance
What makes this possible is the ability for new fintech platforms to plug seamlessly into a company’s cloud accounting package. This in turn generates the availability and effective presentation of a library of relevant credit information, captured automatically and presented in real-time at ever more granular levels using sophisticated, cutting edge platforms. With appropriate analysis, this data allows financiers to build up a detailed, comprehensive and constantly updated risk assessment of a business and its debtors. Such a degree of insight into a company’s risk profile positions new alternative finance providers with the tools they need to offer on demand, near-instant funding to SME clients.
Crucially, this insight takes away a key reason many smaller companies may have failed to obtain finance in the past: they tended to be regarded as unknown quantities and therefore too risky. Now, technology supplies an ongoing record of their creditworthiness. It also obviates the need for borrowers periodically to reapply to extend a loan or line of credit, since all the information the financier requires is available, showing the current value and status of invoices outstanding together with each customer’s previous payment history.
Leveraging technology to optimise credit control
This is just part of what technology-enhanced finance can offer SMEs. The same data that allows the financier to make its lending decisions can also be put to good use by the borrowing company itself to manage its debtors more effectively, using it as the basis on which to set up automated, customised reminders to all those whose invoices are outstanding or overdue.
This digitised, automated approach to debtor management has been found to shorten businesses’ days sales outstanding (DSO) by as much as 23 days; a valuable tool for helping to ensure that cash arrives in the pockets of business owners promptly. What’s more, using automated reminders can save businesses up to 80% of the time they usually spend chasing unpaid invoices manually, thus generating considerable business efficiencies.
This way, technology not only gives companies the means to access finance with ease – exactly at the time and for the period they want – it is also helping to level the corporate playing field by providing smaller companies with the same level of credit control that major corporations have traditionally enjoyed.
These new tools and packages are delivering a high level of flexibility and control to SMEs, allowing them to finance short-term funding gaps cost-effectively, as well as recover monies owed sooner. Certainly, technological disruption has been truly transformative here; this is finance both from and for digital natives, combining the cloud, big data and analytics to enable companies to manage their finances pro-actively and efficiently. The new digital future for SME finance starts here.
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