Loans and business overdrafts have long been the first resort for SMEs seeking funding. However, we all know that the banks are not always willing to lend, especially with economic growth prospects looking shaky in the near future. New research has shown that these tradition ways of funding growth and innovation are not enough, and small businesses will be unable to play their part in the UK economic recovery without alternative finance options.
Research by insolvency trade body R3 has shown that 30% of firms using an overdraft regularly used up their maximum allowance in the three months leading to March. This is nearly double the amount in the comparable time period last year, which saw 17% of firms using up their overdrafts.
This shows that many businesses are relying on their overdrafts too much, or else are using them inappropriately. Philip Monks, chief executive of small business bank Aldermore, commented that businesses need to learn to use alternative finance solutions, such as invoice discounting and factoring, to solve their cash flow problems.
He commented, “One of the biggest blockages small businesses have is that they’re often part of a value chain where their customers and suppliers are bigger than they are. Little old SME, stuck in the middle, not getting the money in but under pressure to pay early – he’s got a debtor book that allows him to say he’s making a profit but doesn’t give any cash. While he’s praying the big guys will pay up, the electricity bill lands. The best thing you can do is raise finance on the debtor book. It’s often much more appropriate than an overdraft, which is the laziest financial product in the world.”
This all paints a familiar picture, and is a problem that we often see with small businesses caught in supply chains. Taking advantage of having valuable invoices can therefore be important in keeping cash flow running. Invoice finance is a flexible way to raise capital, without having to worry about overdraft limits or interest rates.