At one time, the funding options available to small-to-medium enterprises were limited. Beyond traditional bank loans and overdrafts there was little from which to choose. Adding colour to an otherwise black and white situation, invoice finance was initially viewed with caution when it launched onto the business finance scene more than 40 years ago.

However, far from being a passing trend, invoice finance has firmly established itself as a mainstream player. In fact, by the end of last year, more than £11bn was advanced to SME clients through factoring, invoice discounting and asset-based lending, according to the Factors and Discounters Association. Funding to SMEs, as defined by the British Bankers Association, was only £8.9bn.

The beast of burden

This growing popularity can be attributed to more than the ability to access working capital as soon as an invoice is raised. Invoice finance can also remove the burden of personal guarantees from company directors, allowing them to focus more energy on running the business.

‘Times have changed since invoice financiers were seen as offering a loan of last resort,’ says Andrew Williamson, partner at Mazars. ‘Now they are very much viewed as providing a pragmatic and flexible approach to funding working capital needs. This is more in line with the needs of SMEs.

‘Many of my clients have already chosen to take the invoice finance route. They like the way the funds available can evolve with their needs rather than having access to arbitrary amounts through bank overdrafts and loans. For example, if a business has a good month and raises an additional £100,000 worth of invoices, they might receive, say, £85,000 of extra working capital immediately. That just isn’t possible with an overdraft facility. It’s ideally placed to help a growing business.’

Complementing factoring and invoice discounting services, the latest finance accessories include bad debt protection, the Department of Trade and Industry’s Small Firms Loan Guarantee (SFLG), plus a range of asset-based finance solutions.

Bad debt protection provides valuable peace of mind. An ongoing concern for all businesses, bad debt is particularly troublesome for companies that are reliant on a few key customers. According to the UK Payment Index by Intrum Justitia, businesses are losing 1.8% of total revenue to bad debts. The average customer’s payment time in 2005 was 52.3 days and has now stretched to more than 54 days.

Bad debt protection covers businesses against a customer failing to pay, or worse, becoming insolvent. Cover can be provided for 100% of the amount owed. ‘There are obviously costs attached,’ adds Williamson. ‘However, the peace of mind and security of having bad debt protection in place is worth it. We find it especially useful for businesses that are reliant on a couple of key clients. Those that supply to trades, which are sensitive to market fluctuations, can also benefit.’

Many businesses, especially those with a turnover of between £2m to £15m, want to maximise funding options through the financing of assets other than just invoices. Previously, this type of asset-based finance was only available to large companies. However, financiers have opened this service to medium-size firms, allowing more companies to raise funds against assets such as plant, machinery, property and stock.

Lend a hand

Asset-based lending is a perfect option for businesses that need ready working capital. It is particularly popular with firms going through a management buy-out, a buy-in, restructuring, acquisition, refinancing or turnaround.

When Courts (UK) Ltd went into administration, manager Peter Kelsey proposed an MBO that would secure the future of the contracts division. ‘It had been my ambition to buy Courts Contracts,’ says Kelsey. ‘I had already raised sufficient funds to underpin the MBO. However, I required an injection of working capital to cover running costs and stabilise cash flow during the first year of trading. Asset-based finance was the obvious choice. It offered immediate and ongoing access to funding, leveraged against Courts Contracts’ assets. As a result, the renamed, Designer Contracts has been able to withstand seasonal fluctuations within the building sector and is facing a secure and independent future.’

LOAN AND BEHOLD 

The Small Firms Loan Guarantee (SFLG) is a joint venture between the Department of Trade and Industry and a number of participating lenders. It was set up to help SMEs that are unable to obtain a conventional loan because of a lack of assets, or trading history. Offered in association with factoring or invoice discounting options, the SFLG can provide SMEs with up to £250,000. This can be used for expansion, investment in plant and machinery, acquiring new business equipment, development of a project, or improving operational efficiency.

Having worked with a number of clients who have taken an SFLG, Mazars partner Andrew Williamson has seen the benefits first hand. ‘I have seen many businesses grow at a much quicker rate than they would have been able to do, thanks to the injection of cash an SFLG can provide.’

Leapfrog Computers, a specialist in the supply and installation of interactive whiteboards, needed finance to support expansion plans. ‘The loan [100,000] was in conjunction with an invoice discounting facility, which has worked well for us,’ says MD Lee Bevan. ‘We are now in a strong financial position to maximise growth opportunities.’

Steve Websdale is director of Venture Finance