The emergence of the government’s invoice-based Supply Chain Finance scheme, which could be worth as much as £20 billion in small business lending, has rubber stamped the role of alternative SME finance services such as invoice discounting and factoring.
The alternative SME finance sector has become increasingly mainstream over the last 18 months as banks have proved reluctant to soften their cautious approach to small business lending, and the government’s latest SME funding scheme is confirmation of this shift in the small business credit landscape.
Under the new scheme, a large company notifies a bank that an invoice from an SME has been approved for payment. Knowing that the invoice will be paid, the bank can then immediately offer a 100% advance to the supplier at lower interest. Rolls-Royce and Vodafone already have the scheme in place and the government wants other large companies to follow suit.
Whether this latest SME finance scheme has wings or will struggle to get off the ground like previous initiatives remains to be seen – and there are questions to be asked about the banks’ willingness to offer lower interest rates – it does underline the important role that invoice finance is playing in helping companies maintain cash flow.
The use of asset-based finance continues to expand with invoice discounting driving this growth. Despite the various government schemes, generating start-up funding and maintaining cash flow remains a challenge and it is the alternative SME finance sector that is providing this essential traction.
Invoice discounting is a flexible and transparent form of SME finance that requires no long-term commitment and offers quick access to capital. It can also be used in tandem with traditional lending services. Awareness of the benefits of invoice finance has grown rapidly in the SME sector and now it seems that the penny has dropped for the government, too.
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