Why SMEs are turning unpaid invoices into cash

In most business cases, orders for goods or services are steadily coming in and you expect payment on a large invoice from one of your most reliable customers in a week or two. Your customer is a little bit late paying you, but you trust them enough to know they will pay you eventually. The conundrum is, you have to pay your employees and other business costs in a few days and the funds are not coming in quick enough for you to pay your overheads and running costs.

It’s no secret that cash flow is notoriously a main concern for SMEs, and it is quite likely that these concerns keep SME bosses awake at night, with a third admitting that insufficient working capital has stunted their growth plans. Research from Barclaycard showed that 63 per cent of SME decision-makers worry about their business’ cash flow, and spend an average of half a working day every week on cash flow activities, while a guaranteed date for payment tops their working capital wish-list. Money management is not only stressful, but most importantly time consuming, impeding business growth.

Regardless of whether a business is in an advanced economy, emerging area or somewhere in between, cash flow is a fundamental resource that determines the shelf life of a business.

The challenge for SMEs to find short-term business financing
According to the 2017 Small Business Credit Survey, SMEs continued to face ongoing financial challenges — most commonly, paying operating expenses and wages, and credit availability proving to be key factors to decimating cash flow — particularly firms in the leisure and hospitality industry.

Taking control of cash flow could unlock opportunities, and SME leaders have stated that insufficient working capital has prevented them from growing their business.

The problem for SMEs is that banks are reluctant to take on risk and lower collateral levels, implying that they require more than the promise of a paid invoice. Banks do not know or have a relationship with your customers, so in their minds, why would they trust and know that the invoices will be paid. The banks approval process becomes slow and less certain, which is also why less than half of all SMEs seek business financing from either large or small banks.

Funding option solutions

The most popular solution to working capital woes, cited by 25 per cent of SMEs, is the ability to guarantee a date when payments would be received from a customer. This is followed by being able to protect their accounts receivable regardless of external factors, such as a customer going out of business.

A cash crunch situation is wholly preventable with the right support, small businesses should explore how they can reduce the time and energy they spend on managing working capital problems, and adopt a solution that smoothens out uneven cash flow.

Whether they are looking for a solution to help them seize a new sales opportunity or invest in new business technology, there are a variety of SME-friendly solutions out there, a popular form now being invoice financing factoring (asset-based lending) where businesses can advance cash against their outstanding invoices. this form of funding also prevents businesses from getting trapped into cash crunch that plants consequential obstacles by allowing them to liquidate invoices within just 24 hours.

According to P2P Finance News, the proportion of small firms seeking external finance that apply for asset-based or invoice finance factoring has risen to around one in three this quarter — up from one in seven at this time two years ago. 34% of SMEs now turn to alternative small business financing, most commonly now invoice factoring and invoice financing. For many of these businesses, these options are the answer to their cash flow crisis.

Lou Chan, Populous World.

Populous World provides industry-expert invoice finance services and can unlock cash in as quickly as 24 hours, your business can release up to 95% of the value of your invoices.