Today’s businesses don’t look a whole lot like yesterday’s businesses.
Technology or creative industry companies are often rich in intellectual property, but not the other kind. All of which can make financing cash short falls or filling working capital gaps that much harder.
The gulf between the funding needs of growing businesses, especially in the small business sector, and the availability of traditional forms of lending has been well documented.
Although business models and ways of operating have moved on, traditional banking and mainstream finance providers haven’t kept pace.
Take applying for a bank loan, for instance.
Securing business loans takes time. Loan applications are lengthy procedures and carry a heavy administrative load. Banks’ requirements often include two years of company accounts along with management accounts and cash flow forecasts. Banks may also expect business owners to offer security in the form of property or equipment or even personal assets – not necessarily easy for today’s asset-lite businesses to supply.
Even then, success is far from guaranteed. Banks put loan applications before internal credit committees who may conclude that the applicant is too risky a prospect or that it comes from a industry or sector already over-represented within their loan book – a disappointing verdict that many an owner-manager has waited weeks to hear.
Added to which business advisers increasingly warn that loans are not always the most appropriate way of funding shortfalls in working capital. If a business wins a substantial new order, devoting time to a loan application and then getting locked in to a 12-month repayment period or longer to fund it merely introduces a long-term regular expense in the form of repayments. And the loan may rumble on long after the order in question has been funded, dispatched and payment collected.
You don’t need to add a liability to your balance sheet, instead you can convert assets on your balance sheet – like invoices – into working capital.
Invoice finance represents a more flexible short-term funding mechanism. Online invoice finance providers like MarketInvoice can sell single unpaid invoices online to a pool of investors, who take a small charge in exchange. Customers receive around 80% of the value of their invoice straightaway, within one or two days.
A new customer business will go through some initial checks to ensure the invoice is valid and the business is generally sound, but invoice finance eliminates the lengthy application process as well as the need to put up security in the form of business or personal assets.
Using unpaid invoices, which really represent a company’s future income, to secure working capital means that businesses can use what they already have to fund their current needs, instead of depending on a bank to advance cash that will have to be repaid over a long period and cost more.