UK businesses warned not to bank on securing traditional financing

Businesses in the UK have received the message that they must follow the lead set by the construction industry and relinquish their reliance on bank financing and seek out other sources if they are to overcome hurdles and continue to grow.

This is the message sent out by Cranfield Business Finance, a specialist business fund provider, who have cited such alternative sources of funding as invoice financing as key measures in the development of British businesses.

The Midlands-based firm cites recent figures from the latest Manufacturing Advisory Service (MAS) Barometer which state 67% of SMEs (small and medium sized enterprises) predict expansion over the next two to three years, but, with banks remaining reluctant to lend funds, access to finance is still holding companies back.

Alternative means of funding, particularly invoice financing, which offers short-term lending to businesses, are vital to fuelling business growth.

Patrick Murtagh, Director of Cranfield Business Finance, highlights the construction sector as one that has begun to rely on invoice financing as a way of accessing much-needed business funds. This follows an announcement by the Federation of Master Builders earlier this year that a quarter of its members had missed out on projects after being refused funding through traditional methods.

Banking finance currently accounts for 80% of funding for SMEs in the UK, which compares with just 30% in the USA, but with bank loans still difficult to secure, Cranfield is stressing that it is time for UK businesses to step back from their reliance on traditional sources and seek alternatives.

“Businesses cannot sit on their hands and wait for banks and other traditional lenders to loosen the purse strings. If conditions are right to expand now, they need to choose a fresh approach to finance so they grab that opportunity,” said Mr Murtagh.

“While predictions of growth across a number of sectors is excellent news, the lack of traditional funding and the ever-present problem of late payment means there is likely to be a funding gap. For too long, businesses have not been investigating the full range of funding solutions that may be available to them. This has to change.”

A recent report by the British Chambers of Commerce revealed the extent of the late payment problems in a survey of SMEs. Its research showed 94% of respondents had been paid late, while almost a quarter (24%) of those asked experienced delays with more than 40% of their payments.

Once dismissed as a controversial way to fund business, invoice finance is now a popular method of funding in the construction industry and other sectors can learn from this trend.

Factoring is a disclosed facility which incorporates credit control, debt collection and funding, and  can also include bad debt protection. Invoice discounting is a funding only solution. It is usually confidential, and leaves the credit management to the individual company. This service can also include bad debt protection.

Mr Murtagh explained: “Invoice discounting can be seen as a different type of short-term borrowing, which enables a business to borrow a percentage of its unpaid invoice from a finance company. However, in this instance the business is still responsible for chasing the debt – and not the finance company that has made the loan. This applies to confidential invoice discounting.

“There are five million SMEs across the UK and if 67% of them predict they are going to grow over the next two to three years that will make a huge difference to this country’s economic prospects.”

“However, it is important for any SME that is looking to find alternative funding seeks support from an established company that provides a good deal so that it can achieve growth.”