While invoice financing has undoubtedly grown significantly in Australia in recent years, the latest figures show that it still accounts for a relatively small percentage of business lending. This suggests that invoice finance is still seen as a niche or specialist method of business funding, suitable for only a few firms or for certain scenarios and hence often has associated negative connotations in Australia.
Nothing could be further from the truth – and there is an easy case study to prove it: Britain!
British companies, including many SMEs, use invoice finance habitually, often as a first choice because they know it’s cheap, convenient and simple to implement.
One Fifth of GDP and Growing
Whereas in Australia invoice financing volumes are equivalent to about 3.9% of GDP, with around AU$7 billion lent at any one time, in the UK the cash advanced to firms stood at about 19% of the whole economy last year.
Official figures from UK Finance showed support for businesses through invoice finance and asset based lending at the end of 2018 stood at £22.7 billion (AU$42bn), some 2.5% higher than the same period in 2017.
The agency has noted that there was immediate potential for even more cash to be injected if businesses needed it: an additional £8.5bn in undrawn funding remained available to clients of UK invoice and asset finance providers.
The report goes on: “The number of businesses using invoice finance and asset-based lending during the year remained steady at over 40,000. The number of larger SMEs (those with turnovers in excess of £10 million per annum) using invoice finance and asset-based lending increased by 13 per cent compared to the same month a year ago. Advances against certain assets other than invoices increased substantially year-on-year, with an 18% rise in lending against stock and 16% increase in lending against plant and machinery.”
Even after allowing for the fact that the British figures include lending against stock and machinery – which is distinct from invoice finance – it is clear that debtor or invoice finance is a far bigger part of the business funding mix in the UK than it is in Australia.
Invoice Finance is Popular When Businesses Know About It
The main reason why invoice finance and supply chain finance is so popular in the UK is that more business owners are familiar with the concept and embrace it. This is not entirely a coincidence: since the financial crisis, the British government has made considerable efforts to ensure business owners get to see more of the funding options open to them. In 2016, the Small Business Enterprise and Employment Act made it a legal requirement for banks to refer SMEs they turn down for commercial loans to an alternative finance provider, such as debtor finance firms.
At the same time, some of the banks themselves have moved into the cash flow finance space with their own offers. This means that a business owner or finance chief that sits in the bank manager’s office asking for a loan is also likely to be pointed towards debtor or invoice finance options, should they be deemed suitable, as debtor or invoice is often the better suited option to fast growing businesses, wanting upfront cash to assist in their growth, without having the burden of having to repay principal and interest back, had they taken out a loan. Invoice finance is not a loan and business owners in Britain like this as all it is doing is advancing a business its cash today against outstanding debtors that are only due to be received in 30, 60 or even 90 day’s time.
Often, these business leaders look at the options on the table and choose invoice finance, because they can see it makes better sense for their needs: not only is it quick, easy to arrange and safe, invoice finance is often a cheaper way of raising money for a trading business, otherwise 40,000+ British businesses wouldn’t be doing it!
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