The tapering of government Covid support schemes this year will see opportunities for invoice finance providers, a market valued at £2.12 trillion globally, writes Roger Vincent, the UK&I managing director of Trade Ledger.
Through the 2020/21 pandemic, companies in the UK that had some, or all, of their staff on furlough have generated little value – in other words, not much in the way of assets, whether tangible (manufactured items) or intangible (services provided).
To fire up their businesses, as government support schemes wind down, companies will need working capital, to buy in resources, sell the resulting goods and services, and eventually receive payment.
At the same time, they’ll be faced with the repayments that become due on government loans and the need to fund staff coming off furlough. SMEs will need all the help they can get.
Invoice finance and leasing
This means a flood of new customers for invoice finance and leasing in the second half of 2021. There are some challenges. The SME market isn’t the easiest for lenders. The processes for origination and servicing are comparatively complex and expensive.
But, on the positive side, the risks aren’t as great as they might first seem. Leasing and invoice finance are good solutions for lenders and brokers. They are secured, so if a debtor ceases to trade, in the main the lender will get the money back from the asset or invoice(s), and the lender ranks ahead of many other creditors. Losses from leasing and invoice finance are typically 0.5 per cent to 3 per cent, which is rather better than a bank would suffer from unsecured bad debts.
So, there are appropriate products for meeting the coming demand, but how about delivery?
Critical to the survival of many SMEs is the time-to-cash metric. It’s no good if the SME fails because it took the lender too long to process the loan application. At present, an SME owner, often with their broker, must spend 30 hours applying for a loan, and time-to-cash can be 90 days or even longer. The lender’s time is swallowed up by processes that involve moving paper forms, invoices and documents around, hunting for enclosures in email inboxes, and re-keying information to move it from one part of the application and origination systems to another.
Multiply that many times and it’s clear that current processes won’t manage the flood of demand – and their slowness could even be a threat to the survival of many SMEs.
Factoring has the extra complexity that, every time the SME issues an invoice, it must be stamped and assigned to the factor, who effectively holds the sales ledger on behalf of the client, and then must chase up the debts. It’s laborious and time-consuming. But digitising and automating can make a huge difference.
Receivables finance software
If the sales ledger is assigned as a whole, digitally, things become far easier. The loan can be based on the value of the ledger as a whole, avoiding the need for an administrative overhead per invoice. The process can be set up to highlight late payments, enabling the factor to manage the exceptions, rather than managing every single invoice.
Assigning the sales ledger is just one aspect that can be digitised and automated – the whole application and origination piece can be as well.
A lending platform can support all of this and bring together all the data needed throughout the lifecycle of a loan, from the borrower’s accounting system, the lender’s core systems, and third-party data providers.
Any platform worth its salt provides analysis, automates processes, and provides dashboard information so all the parties (including brokers) can check the status of both individual accounts and the processes.
Equally, such a process may allow lenders to handle their broker channel in the same way as their in-house teams. The difference this makes is huge, to brokers and aggregators as well as lenders.