The world and its individual economies have moved on in a million ways since the onset of the financial crisis of 2008 but, in certain respects, its impact is still being felt and particularly by small-to-medium-sized enterprises (SMEs).
Put simply, it remains painfully and often dauntingly difficult for SMEs and many of their larger counterparts to secure access to funds and finance they can use to build and support their operations.
At least, that is the case in the context of traditional routes to funding such as bank loans. But, while the big banks in the UK, Europe and elsewhere remain broadly reluctant or unable to offer credit to SMEs, increasingly popular and reliable alternative sources of finance are emerging.
Here are 4 of the most common currently available:
1 – Invoice factoring
Maintaining cash flow at levels that are sustainable and which afford a measure of flexibility are vitally important for every SME, regardless of the sector they operate in or the nature of their services. Hold ups in being paid from clients therefore can be a serious headache for companies whose access to cash and liquid assets is limited. Invoice factoring offers a straightforward solution to these issues and allows businesses to raise funds in the short term by selling all or part of amounts owed by clients. There are fees to be paid when taking up the option of invoice factoring but SMEs very often place higher value on the prospect of getting paid much more quickly than they otherwise might.
Another aspect of the appeal of invoice factoring is the potential for company directors to avoid taking on debts for their businesses on the basis of personal guarantees. Invoice factoring agreements are reached on the basis that a company’s clients will pay monies owed and that when they do lenders then take their share as agreed. So, there is no need for individual directors to become involved on a personal financial level in order to secure funds for their companies. This type of funding is good for business owner’s that have immediate overhead to continue providing services and maintain operation and even good for truck drivers that need immediate cash flow to maintain their fleet (companies like TBS Factoring for example excels in this area).
2 – Invoice discounting
Invoice discounting is almost entirely the same as invoice factoring and it is founded on the same principle of raising funds on the basis of future payments from clients. The key distinction is that with invoice discounting, a company continues to liaise with customers with regard to payments and remains responsible for securing monies owed as agreed. In the case of invoice factoring, the buyer of the invoice takes responsibility for ensuring that all relevant payments are received. There are benefits on both sides of the coin when it comes to deciding between invoice discounting or factoring. Smaller businesses might view the shifting of responsibility for collecting debts to a third party as a bonus, whereas other companies might prefer to maintain communications around payments entirely in-house while still raising funds through invoice discounting. In either case, the fees involved are usually between 10% and 20% of the value of the invoice in question.
Four Types of Alternative Finance for Businesses3 – Asset financing
A wide variety of SMEs, particularly those based entirely in online environments, can operate without much need for expensive equipment or tools. There are, however, a great many businesses that need upfront investments in order to get started and to achieve any level of sustainability. Traditionally, it has been the role of banks or other money lenders to provide credit for vital purchases to companies that need them. In today’s broadly risk-averse financial climate, this kind of funding can be difficult to access and asset finance presents a very viable alternative means of achieving the same end. Asset finance essentially gives companies the option of leasing equipment, vehicles or tools of any kind that are central to the viability of their business.
4 – Asset refinancing
SMEs can often find themselves facing acute cash flow problems despite owning a variety of expensive assets. When this situation arises, tangible assets can be sold and leased back under the terms of an asset refinancing arrangement.
The alternative finance market has evolved dramatically since the financial crisis at the end of the last decade and savvy SMEs are finding new and innovative ways of accessing the funds they need to survive and plan for the future. Every situation is different and directors looking at their alternative funding options need to seek out the best advice and support they can find to be sure of picking the right route to fresh finance.
Conrad Ford is Managing Director of Funding Options, an award-winning team of business finance experts who specialise in helping businesses get the loans they need. Conrad is a Chartered Management Accountant who served in the group strategy department of a leading global bank, before joining their fast-growing technology subsidiary where he served as COO during a period in which it won multiple awards. Conrad has a Masters from Cambridge University.
