News this week from PricewaterhouseCoopers (PwC) that the popularity of high-street credit cards is faltering, nearly five decades since their introduction, as consumers switch to alternative personal finance products, such as pay-day loans, is unlikely to have come as much of a surprise to small business owners in the UK, who have steadily reduced their reliance on high-street bank SME finance services in recent years, turning to alternative SME credit facilities such as invoice finance and asset finance.

According to PwC, card borrowing declined in 2011, with nearly one million cards discarded during the year. There are comparisons here that can be drawn with trends in SME finance provision. As these figures from the Asset Based Finance Association show, small businesses are increasingly turning to invoice discounting and factoring instead of loans and overdrafts from high-street SME finance providers.

PwC predicts that the use of alternative finance services will continue to rise and that these service providers may expand their products and encroach further into mainstream finance territory. The same can be said of small business finance, although the boundaries are perhaps more rigid here, making it a matter of companies using the likes of invoice finance and asset finance alongside, rather than instead of, mainstream SME lending services.

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So Sir Fred is now just plain old Fred, a move that should buy the Prime Minister some capital and, maybe, will allow the government to focus on improving conditions surrounding small business finance. The recent launch of the new Business in You campaign, designed to inspire people to start or grow their own businesses and help small businesses to understand the help available to them, is certainly a step in the right direction.

As part of the campaign, the government will offer access to information on alternatives to SME bank loans. Such a move is timely, not just because a recent report has shown some optimism in the SME sector for 2012, but also because another study has illustrated the continuing lack of confidence that the SME sector has in bank small business lending.

According to new research from HSBC Commercial Bank, nearly 85% of SMEs believe they will grow over the next 12 months, with one in five aspiring to grow market share and over 50% expecting to increase turnover.

At the same time, another new report has shown that, despite government initiatives and bank announcements promoting SME lending, small businesses believe they will need to seek alternative ways of SME funding in 2012. These findings shine a spotlight on alternative small business credit products such as invoice discounting, factoring and asset finance, whose popularity has grown strongly in recent years.

Looking ahead for 2012, it seems clear that, in terms of small business lending, SME finance strategies will increasingly encompass both mainstream and alternative SME loan facilities.

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New information has hit the headlines showing that the average salary for over 1,200 senior staff at eight city banks in 2010 was £1.8 million. It has appeared at the same time as a report from the Bank of England showing that SME lending is continuing to contract. According to the Trends in Lending report, lending to smaller businesses shrank by 6.1% for the year to November 2011.

That the payment of millions of pounds to senior bankers at a time when many SMEs are fighting for their lives will grate, particularly with owners and employees of the latter companies, goes without saying. So, what can these businesses do?

It would seem that changing bank isn’t an option. A new study shows that Britons are reluctant to shift allegiances despite poor service. Based on these findings, it is hard to imagine small business owners jumping ship from a high-street lender to an alternative source of SME lending, such as invoice discounting, factoring or asset finance. But, perhaps the answer lies in combining the two elements of SME finance provision.

Rarely is putting your eggs in one basket a good idea and so it goes with small business credit. Invoice finance is an SME finance facility that complements traditional SME lending services, so with banks unwilling to give much ground in terms of SME lending, perhaps it’s time for companies to overhaul their SME credit strategy.

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The data, featured recently by the British Chambers of Commerce, suggests that nearly a half of these entrepreneurs consider Western Europe as providing the best opportunities, with Eastern Europe and North America attracting the most interest after that. The report goes on to say that some of this expansion may take the form of overseas acquisitions.

Should this development happen, it will be interesting to see where these entrepreneurs generate their finance. In the case of SME lending, the high-street may not produce the required results if the British Bankers Association’s recent Lending to Business document is anything to go by. It is clear that the banking sector still puts a lot of emphasis on lack of demand from the SME sector as a reason for low SME credit availability.

Government efforts to improve small business lending facilities may change this situation, but perhaps not immediately. So, if the high-street banks can’t tick all the boxes, the spotlight falls on alternative SME lending products.

Figures published in late 2011 show invoice finance, including facilities such as invoice discounting and factoring, to be growing strongly in popularity and newer data from the Finance and Leasing Association illustrate a similar trend in asset finance. According to the association, asset finance new business grew in November 2011 to almost £1.9 billion, an increase of 29% compared with the previous year. The strongest growth was reported in business equipment finance.

The year ahead certainly holds challenges for SMEs but also opportunities, and it seems certain that alternative SME lending facilities, such as invoice finance and asset finance, will play a key role in helping companies meet the former and take advantage of the latter.

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A recent survey of businesses in the South East has found that 10% of SMEs are spending more than a quarter of their time chasing outstanding payments. This figure equates to more than a week a month and is an increase on the 6% reported in 2010 and the national average of 9%.

The loss in working days is costing the country an estimated £4 billion and increasing the strain on small businesses, for many of whom cash flow is a major source of difficulty. Raising capital to maintain day-to-day operations has become a challenge for many SMEs that have found mainstream credit lines restricted.

An SME credit facility that can help maintain cash flow and reduce the pressure of late payments is invoice finance, including invoice discounting and factoring. When using invoice finance, the lender involved will usually ensure that the invoice is settled within the specified payment period, helping cash flow and improving relationships with suppliers and customers.

Invoice finance is becoming increasingly popular with SMEs, as these figures show, but it still remains an alternative SME finance product. There is still a lack of awareness of this small business finance facility. However, recent comments from Business Secretary Vince Cable, in which he highlighted alternatives to bank lending, should help push it further into the mainstream.

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While there is evidence of growing optimism about 2012 among UK business leaders, some of it has no doubt been tempered by news that HMRC is planning to introduce a more stringent tax inspection scheme for small businesses from April. Under the new scheme, companies that fail to meet the new requirements face fines of up to £3,000, which is a financial hit that many may not be able to take.

The news will be a blow to the small business sector, which had finished 2011 on a positive note with the government announcing its SME loan scheme to help improve SME lending. Notably, the introduction of the new HMRC scheme flies in the face of government efforts to improve the availability of small business credit through the reduction of red tape.

So, how will small businesses react? Well, considering the sweetheart tax deals offered to the likes of Goldman Sachs and Vodafone, confidence in the government and its initiatives is likely to be significantly shaken. Hence, the move may push SMEs further down the road of alternative services in search of improved small business credit, such as invoice finance, which, as figures released at the end of 2011 show, is an SME lending facility that is proving increasingly popular.

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Despite the numerous proposals, initiatives, plans and schemes that we’ve witnessed over the past 12 months, the problem of improving small business credit, in particular from traditional lenders such as the part state-owned Royal Bank of Scotland, remains unresolved. Tellingly, there have been increasing calls for better use of alternative SME finance and one such format, invoice finance, is posting consistent growth.

According to the latest figures from the Asset Based Finance Association, business funding generated using invoice finance reached £16 billion in the third quarter of 2011, an increase of 9% over the same period in the previous year. One of the strongest areas of growth was in the export sector.

The growing rate of invoice finance, including SME finance products such as invoice discounting and factoring, underlines how companies are using the service to trade successfully. Invoice finance offers a means of quickly and efficiently raising capital to maintain cash flow.

Based on its performance in 2011 and the growing realisation that there is an alternative to traditional SME finance services, we should expect more growth over the next 12 months. In terms of the number of SMEs that use invoice finance, there is still a lot of room for expansion, and this is what could drive growth in the short term, in particular as a rising number of companies at the larger end of the SME scale become more aware of the benefits of this flexible SME finance facility.

To find out more about A&T Business Associates services, contact us on 01903 602211 or info@atbusinessassociates.co.uk.