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Since the credit crunch, businesses and individuals have been more aware of their finances than ever before. While the banks were once considered a reliable institution that could be trusted for steadfast financial support and advice; this perception has irrevocably changed forever.

The borrowing bubble burst and there is no going back. We now know the dire consequences of what happens when a country runs itself on borrowed money, and the suffering caused to small businesses who are the first to have to shut down in a financial crisis.

It makes sense therefore that a recent YouGov survey found that the smaller the size of a company; the less trust they tend to have in the banks. However, feelings of distrust between banks and SMEs are not one way; banks have “become increasingly reluctant to lend to” small businesses, preferring to invest in those with a higher turnover.[i]

Many small companies have had to cope with the bank rejecting their application and may even suffer from the added issue of customers who take a long time to pay their fees (an issue helped by invoice financing).

Therefore increasing numbers of businesses are turning away from the banks and instead seeking alternative financial opportunities. BRDC Continental’s survey of 65,000 small firms found that 30% used traditional financing methods such as overdrafts, loans, and credit cards in comparison to 36% two years ago; instead many are using methods such as invoice financing, provided by expert financial companies like Davies Finance.

Essentially invoice financing is when a third party buys unpaid invoices for a fee –plugging the gap between being paid oneself and paying the worker, it enables you to access funds owed to you by customers who have not yet paid.

This type of financing means that cash flow is managed more efficiently as there is no need to wait for customers to make their payments and instead businesses can quickly access cash which would otherwise be tied up in invoices. It is a quicker, more efficient method than loaning from a bank, which can take a long time to come through.

It was reported in July that Britain’s economic recovery was surpassing its pre-crisis peak. According to Reuters, the economy is now bigger due to “strong growth in the second quarter”. The report also stated that “in annual terms, growth was 3.1 percent” – faster than any other period since the final quarter of 2007; a success that the government are naturally keen to take the credit for.

As part of the recovery, the government have promoted small businesses for the last few years. Sending the message that “small businesses are the lifeblood of the economy”[ii], the Conservatives have boasted of cutting jobs tax (saving businesses up to £2000), “scrapping red tape” to enable them to grow, and doubling rate relief.

Tories claim that in contrast to Labour who were keen on higher taxes and regulations; they allow businesses more relief and self-responsibility; allowing them to source the necessary finances needed for growth.

Despite the government’s encouragement to seek finances away from the bank, the Association of Professional Service Companies states that a lack of trust in banks has still discouraged businesses from expanding; 80% of small companies have not applied for finance at all in the last year[iii].

Many small companies have complained that they have difficulty in obtaining invoice finance, or have assumed that they would not be able to obtain it and would rather not waste their time with a long-winded application for it.

Despite this, invoice finance has been steadily stable over the last few years; small businesses are growing increasingly trusting of it, suggesting that it will continue to expand into a common financial resource.

Davies Finance makes the process of obtaining invoice financing quick and simple, so if you think that your business might benefit from invoice financing, contact us now by calling us on 0845 077 9117 or emailing enquiries@daviescorporate.co.uk.

 

References

 

[1] http://www.money-marketuk.com/Business-and-Finance/3934-invoice-discounting-is-the-new-bank-overdraft-for-smes-needing-cash.html

[2] http://www.bbc.co.uk/news/business-25909235

[3] http://uk.reuters.com/article/2014/08/27/uk-britain-lending-idUKKBN0GR2FH20140827