A new report by information services company Experian has stated that small-to-medium-sized enterprises (SMEs) are facing a significant reduction in trade credit in the current environment.
Trade credit provides a much-needed buffer, allowing businesses to purchase stock and materials ahead of manufacture or provision of service. It is essential for the smooth running of most businesses especially when they are trying to expand.
Many SMEs rely on trade credit terms given by their suppliers to manage their cashflow alongside more traditional methods of overdrafts and bank loans.
Before 2009, trade credit and overdrafts were the most flexible and popular ways for SMEs to access short term funding and manage cashflow.
Trade credit volumes falling
Figures from Experian show that trade credit has fallen among businesses over the last few years and remains at an all-time low. The proportion of SMEs accessing trade credit stood at 10% in 2008. It now stands at 6.1%. This equates to a £4.7bn fall in the amount of credit available to SMEs between 2008 and 2011.
This issue has been further compounded by the difficulty in obtaining additional bank funding to shore up the cashflow gap, with many banks remaining reluctant to lend or imposing restrictive personal security requirements.
What are the alternatives?
Many SME’s have found invoice finance has been able to fill this void and provide much-needed working capital.
Invoice factoring and invoice discounting, two forms of invoice finance, are both viable alternatives to trade credit which work in a similar way and provide high levels of funding to business regardless of its historic financial performance.
How does Invoice Finance work?
With funding being aligned to the sales of the business, it grows inline with the SME’s trading cycles and is secured by their outstanding invoices. This can provide significantly more funding than an overdraft whilst requiring less personal security.
An invoice finance facility also provides accelerated cashflow into a business which can be used to reduce the reliance on trade credit and, in many cases, help the SME achieve early payment discounts from their suppliers.
With more than 40,000 businesses across the UK currently benefiting from invoice finance facilities to the tune of £30bn plus, the industry is already proving its worth to business owners across the UK. It provides a real cashflow alternative which SME’s would do well to consider as part of their overall external finance requirements.