Cash & Liquidity ManagementCash ManagementPracticeNon-Bank Finance Options for SMEs

Non-Bank Finance Options for SMEs

Cash is the lifeblood of any organisation. Get your cash management wrong and no matter how good your product or service offering, you will not survive for long. For many SMEs, poor cash flow happens when they have to pay suppliers and staff before receiving money from their customers. Late payment by customers has played a major part in the failure of many companies.

In the UK, the 1999 Late Payment of Commercial Debts (Interest) Act was introduced in an attempt to speed up payments. However, recent research has revealed that the average time it takes UK companies to pay bills has actually increased by two days. The research was based on the payment patterns of 366,633 companies. It revealed that the average UK business still takes 60 days to pay its bills. Large companies take an average of 21.4 days longer than small companies and 20 days more than mid-sized firms.

The issue has much to do with the bargaining power of the large over the small; in need of trade what is the smaller business to do but bow down to the excessive demands of their larger, and more powerful customer?

Leasing

A well regarded point of sale finance tool, leasing has many benefits for both customer and vendor, not least in helping the customer source higher specification equipment than they would be able to if using cash. One of the less highlighted benefits is that, as the finance provider takes title to the equipment and the customer then pays a rental, the finance provider will pay the invoice on the same day as receipt of correctly completed documentation, i.e. on the date of sale completion. This effectively reduces debtor days to zero. It is also worth noting that many companies, if not offered finance by a supplier, will often then use their own finance providers to recoup the investment in the sale and leaseback approach.

Traditionally leasing was only available for the financing of tangible assets, e.g. photocopiers, vehicles, plant and machinery. Yet the vast majority of companies now provide services, training, consultancy and consumables as part of a total solution, which still includes the hardware. A number of finance providers have recognised this development and are now able to finance hard and soft costs on a single invoice or as part of an ongoing managed solution approach. Gone are the days when providing finance was a simple ‘fire-and-forget’ transaction or when finance providers could pick and choose what they wanted to finance. Finance providers have recognised that long-term customer satisfaction is only achieved by working in partnership with their customers to understand each unique financial situation, so that financing arrangements can be suitably tailored.

Receivables Finance

Another alternative is receivables finance, where the customer is able to raise cash on the back of unpaid and overdue invoices. There are two approaches to this. The first is where a loan is provided using the unpaid invoices as security. The cash is advanced immediately and repaid when the monies are received. The second, called invoice discounting, is where the invoices are sold to the finance provider, typically for between 90 – 97.5% of their full value, who then become responsible for collecting the debt.

1Experian 2006.

Comments are closed.

Subscribe to get your daily business insights

Whitepapers & Resources

2021 Transaction Banking Services Survey
Banking

2021 Transaction Banking Services Survey

2y
CGI Transaction Banking Survey 2020

CGI Transaction Banking Survey 2020

4y
TIS Sanction Screening Survey Report
Payments

TIS Sanction Screening Survey Report

5y
Enhancing your strategic position: Digitalization in Treasury
Payments

Enhancing your strategic position: Digitalization in Treasury

5y
Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation

5y