SME funding: Is selective invoice finance the future?

UK late payment debt has risen by a huge £10.4 billion in the last couple of years alone. According to Pay.UK, SMEs spend more than £500 a month chasing overdue payments, and collectively face an annual bill of £4.4 billion to retrieve money owed.

Since Covid-19, businesses in all sectors have taken a hit in one way or another, so it comes as no surprise that these figures have continued to rise at an unnerving rate.

With many firms implementing crisis management plans in response to problems caused by the pandemic (growing costs, less sales and the late payment problem), there has been an increase in the number of businesses turning to selective invoice finance. Which begs the question, is this a temporary solution, or one that’s here to stay?

What is selective invoice finance?

Invoice finance is a form of short-term funding that enables a business to raise money against its unpaid invoices. In essence, invoice finance providers receive invoices in advance of their payment due date, financing businesses there and then so that they don’t have to wait until payment terms lapse.

There are three main types of invoice finance - factoring, discounting and selective. Selective invoice finance simply means that receivables are sold on an invoice-by-invoice basis, as opposed to the full sales ledger being sold to the finance provider.

This type of finance helps to alleviate cash flow issues created by late and unpaid invoices, seasonal fluctuations and sales dips.

Why is selective invoice finance growing in popularity?

More and more businesses are turning to alternative forms of business funding, such as single invoice finance. Traditionally, common funding products like bank loans have been largely inaccessible to SMEs, due to the fact these businesses aren’t always able to meet lenders criteria for borrowing.

Despite an increased number of loan products entering the market, there remains increased risk tied to these options. Typically, business loans require long term commitments and call for business owners to put down expensive equipment, inventory or even property to secure the loan against. This is because, in the event a business defaults on its loan repayments, the lender wants to ensure they won’t be left out of pocket.

A safe bet for businesses

For many startups and small businesses, this type of borrowing poses a risk too great to take. As a result, several firms are choosing to pursue lower risk funding options, which is where invoice finance comes in.

As mentioned, selective invoice finance works by enabling businesses to pick and choose which pending customer payments they would like to raise money against. The rise of platforms like Penny have allowed businesses to do just this, all without having to lock into lengthy, expensive commitments.

The impact of technology

As the surge for business finance continues during and after the pandemic, we can expect traditional lending facilities to tighten their criteria. This will make alternative funding platforms all the more important for SMEs.

In recent years, rapid expansion of the Fintech sector has resulted in an increase in solutions catering for the demand. This is playing a huge role in ensuring greater access is available to businesses of all shapes, sizes and sectors.

As financial technology continues to evolve, it is clear that the business finance and banking sector will be transformed into an ever growing fast and flexible operation.

Invoice finance trends

Invoice finance is able to offer businesses a reliable source of working capital with limited risk. Platforms like Penny have been filling the vacuum in the business banking gap, offering greater flexibility to businesses that need it most.

Asset-based financing has continued to grow, not only in the UK but across the whole of Europe, resulting in an almost 50% increase in the use of invoice factoring in five years alone.

It is clear that this method of funding will continue to be a key contributor to overall SME financing.

How Penny can help finance your business

Unlike full-book factoring or invoice discounting, single invoice finance allows you to access money instantly, without signing up for complicated, long term contracts or commitments.

Penny works to quickly raise finance against your customer invoices, without taking control of your business’s full sales ledger. After you sell the individual invoices to us, you can receive the owed funds in just 24 hours. We then take over responsibility for following up to ensure any outstanding invoices are paid by your customer by the invoice due date.

It’s been tough times for all, but as far as we’re concerned, the future of invoice finance is bright.

Find out more today.

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