Analysis

Overdraft vs invoice finance

The overdraft has long been a staple of business life for many UK small- and medium-enterprises (SMEs); a valuable source of working capital to support cash flow needs, especially when dealing with late payments.

But as banks scale-back their overdraft offerings, companies are struggling to access finance. Steven Renwick, CEO of Satago, discusses how the rise of alternative finance means this need not sound the death knell for SMEs.

An extension of credit, overdrafts are flexible facilities that can be drawn upon as and when needed to assist businesses with cash flow requirements. The overdraft has existed in the UK for nearly 300 years[1] and has been a stalwart financing option for businesses old and new.

For many SMEs, however, the option is no longer on the table. Capital controls imposed following the 2008 financial crisis have meant that banks have been systematically decreasing their overdrafts in order to clean up their balance sheets – and, with banks prioritising business with multinational corporates, it is SME overdrafts that are the prime targets for the cull.

There are 5.4 million SMEs in the UK[2], making up 99% of all the country’s businesses[3] and playing a key role in the health of the economy. Certainly, the sector is one that should be sustained and encouraged to grow. Yet figures have shown that lending to small businesses via overdrafts is dropping by as much as £100 million each month. And the total value of such facilities has fallen by a massive 42% in the last five years – from £20.9 billion in April 2011 to £12.1 billion in March 2016[4].

This is having a devastating impact on many SMEs, restricting working capital for hundreds of thousands of businesses that have relied on overdrafts to provide short term cash flow support. Indeed, traditionally overdrafts have been viewed as a particularly useful means

for addressing the issue of late payments – a perennial problem affecting SMEs. It has been estimated that half of all invoices owed to small companies in the UK are overdue, averaging nearly £21,000[1], meaning that many must juggle funding gaps. Yet, a recent survey of business owners revealed that 30% saw reductions imposed on their overdrafts between 2013 and 2015, while approximately 17% reported having their overdrafts completely removed[2].

 The next generation of finance

Yet there is little to suggest that a comeback from the once-common overdraft is on the cards, presenting significant challenges to SMEs, who must seek other means of addressing cash flow needs triggered by late payments.

In this respect, alternative finance is stepping up to the plate, presenting new avenues of technology-based funding that are affordable and, importantly, readily accessible alternatives to the overdraft. As a result, the financing landscape is shifting dramatically for UK SMEs, with companies unable to access capital from the banks instead utilising £76 billion from alternative financiers, (according to Funding Options). Alternative lending to SMEs now equates to 46% of the value of that of traditional term loans and overdrafts[3].

Invoice finance has emerged as a valid alternative – and even a preference – to the overdraft. In particular, selective invoice finance is an effective, valuable method of addressing late payments. This type of flexible funding facilitates immediate access to cash tied up in individual unpaid invoices (as opposed to the approach of financing the entire sales ledger used in more “traditional” invoice financing, which may not be a cost effective solution). Certainly, this new approach ticks a lot of boxes for SMEs as invoice finance is specifically designed for debtor books, which allows small businesses to free up working capital and facilitate improved cash management capabilities.

What’s more, some alternative financiers are leveraging cutting-edge, real-time technology capabilities to gain a greater understanding of companies seeking finance (compared with many bank assessments of SME overdraft applications, for example), which in turn is enabling them to undertake effective, superior risk analysis. With such insights, providers can be better-positioned to finance certain companies, and are therefore more likely to be able to meet the needs of those denied finance elsewhere.

A step further

Alongside specific finance solutions, innovative companies are also using technology to help SMEs improve their financial health via enhanced credit control functionality. By automating the debtor management process – with solutions that provide continued tracking of invoices, with automatic, customisable reminders sent to customers – users can not only manage their invoices more effectively, business efficiency and productivity can be improved. Indeed, by optimising credit their control strategies, it can even be possible for SMEs to reduce their late payment volumes to such an extent that external finance support is no longer required.

With overdrafts on the endangered list, it is important that SMEs that require cash flow support have a suitable strategy in place to address the issue of late payments. A new era of finance is emerging, and alternative financiers are positioned to equip the underserved SME sector with the tools they need to flourish.

Author:

Steven Renwick
Steven Renwick

Steven started Satago after experiencing the problem of late-paying customers in his family business in the construction sector and deciding to build something to help tackle the problem.

Prior to starting Satago, Steven was Director of Global Projects at Rocket Internet, one of the world’s largest eCommerce investment companies, where he helped launch dozens of companies worldwide. Steven is a regular speaker on SME credit control and has written on the topic for a number of publications including the Institute of Directors’ “Growing Business Handbook”. He has an MBA from the University of Oxford and in a previous life was a research scientist, with a PhD in Genetics from University College London.

 

[1] http://news.bbc.co.uk/1/hi/business/7839823.stm

[2] www.parliament.uk/briefing-papers/sn06152.pdf

[3] www.parliament.uk/briefing-papers/sn06152.pdf

[4] https://www.fundingoptions.com/latest/sme-overdrafts-dying-out-as-banks-cut-100m-a-month/

[5] http://www.freshbusinessthinking.com/half-of-all-invoices-are-overdue/

[6] http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11951747/Small-businesses-losing-overdrafts-at-a-rate-of-5m-per-day.html

[7] http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11951747/Small-businesses-losing-overdrafts-at-a-rate-of-5m-per-day.html

Satago is an all-in-one online finance and cash-flow platform offering finance and receivables management to microbusinesses and small- and medium-sized enterprises (SMEs). The fintech firm serves a large but under-served business segment in the UK, overcoming the issue of late payments by converting outstanding invoices into cash, and using innovative technology to give small businesses the same level of credit control as their larger counterparts. (www.satago.com)

 

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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