An alternative finance solution for small businesses

Borrowing money is essential for the growth of any business, and none more so than the small to medium sized enterprises. SMEs need start-up capital, as well as a further financial push down the line to ensure they keep growing and expanding. If you run a small business, you’ve no doubt ploughed your own funds into the enterprise as well as looked to secure funding from other sources; most notably the bank.

Borrowing from the bank

In the current economic climate this is becoming more and more difficult with banks being reluctant to lend money to small businesses. This creates a difficult position in the UK. We need small businesses to continue to grow to improve the economy, but banks won’t lend this money due to the state of the economy. In their reluctance to agree to traditional forms of lending, including overdrafts, the banks are creating a vacuum into which non-traditional forms of finance are moving. The biggest of these being invoice finance.

Invoice finance

Those unpaid invoices on your sales ledger have value. The best way to look at them is debts that your customers have agreed to pay. Through invoice finance you’ll be forwarded an agreed percentage of the value of your outstanding sales ledger. This means that instead of waiting for weeks or months to get paid, you’ll get much quicker access to your money. Once the invoices are paid, you’ll receive the remaining percentage minus a small agreed fee.

Invoice finance takes two forms; debt factoring and invoice discounting. Factoring is a flexible funding and collections service whereby the invoice finance provider will act as your credit department and chase the outstanding invoices for you. If you release cash through invoice factoring this will leave you free to focus on the day to day running of your business safe in the knowledge you have the finance to keep moving forward. Invoice discounting enables you to manage your sales ledger, so your clients are never aware of you using the service.

Is this a good option for my business?

Every business is different. The best option for your enterprise may not necessarily suit a business in another sector. It is, however, always important to look into all your available options. If you fail to secure funding from the bank it can feel like the end of the road; but it’s therefore imperative you make yourself aware of the more flexible asset based finance available to you. Not every solution may suit you, but it’s always essential you understand your options.

Jane Tchan is editor of SmallBizPod. She has more than 30 years of experience gained from working across a diverse range of industries, including tourism and leisure, retailing, sports sponsorship and food. During that time she has edited a variety of publications and online media http://www.smallbizpod.co.uk