Catalyst's guide to the alternative finance market - part 1
Over the next few weeks we’ll be exploring the growing alternative (i.e. non-bank) finance market – particularly focusing on Invoice Finance which is the most established part of the sector. We’ll look to explore what types of new finance are available to UK SME’s, including variations on the traditional “whole-turnover” invoice finance model. We’ll examine some of the benefits and drawbacks of each and then look at how the individual business owner can find the best solution for his or her business depending on their needs and requirements.
Invoice factoring – the last resort?
There are many misconceptions about invoice factoring, The most common of which is that it’s a murky industry and the financing option of last resort. The myth still persists amongst many traditionalists that any business which has to sink as low as factoring is on the brink of failure.
At one time this may have been partly true. There was a period when banks granted overdrafts to almost anyone who walked through the door with a half decent business idea and a bit of a financial plan. If you couldn’t get bank funding it probably meant your business was in trouble – and at that time there’s no doubt that a few unscrupulous invoice finance providers did take advantage of this situation to the detriment of potentially sound businesses.
Times have changed
Nowadays, the reality is very different. Bank finance is far from easy to obtain and in most cases the banks themselves will only offer finance through one or other invoice finance product. Even where a standard overdraft is available, the level of finance provided may not be sufficient to meet working capital requirements and there are too many stories of overdraft facilities being withdrawn at short or no notice, for this to be the safe, reliable form of finance it used to be.
The vacuum created by this shortage of bank finance has directly lead to the growth of alternative finance options. As the sector has grown, competition within it has resulted in most independent providers cleaning up their acts. The best are clear about what they offer and transparent about pricing, both very important considerations for anyone looking to dip their toe into this market.
Alternative finance providers tend to be more customer focussed than their banking cousins and should have a genuine desire to help UK SME’s grow and expand by providing appropriate cashflow solutions. Again prospective borrowers need to think carefully about the importance potential lenders place on this when considering their options. For most borrowers a strong relationship with their lender will ensure that their needs are properly met in the longer term.
Whether through the bank or another provider, invoice finance has become one of the primary sources of working capital finance for most SME’s in the UK. Now that debt finance has become acceptable – even the norm, rather than the exception – it is crucial that businesses looking for working capital finance shop around carefully for the financing arrangement which best suits their particular needs.
Invoice finance is a sophisticated product these days with many different options available. As with all mature markets, choices have grown and the obvious solution is not always the best.
So what are the choices out there?
Our next article will examine the traditional and the newer invoice finance products now available in the market. All have their own place and respond to different needs so for that reason alone, it is important to ensure that the right product is being used in the right place.
Jeremy Lawrence is the Founder Director of Catalyst Finance
Contact Catalyst on 01453 758365
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