How Alternative Finance is Transforming Invoice Discounting and Factoring

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Date

11th November 201525th May 2016

We all know that SMEs are the engine of the UK economy. The weakest two parts of the recovery are productivity and export and finance can help bring both up to speed. But for SMEs to continue to grow they need better access to finance. Nowadays the banks aren’t providing it, so who else can SMEs turn to? Factoring and Invoice Discounting providers are readily available. Yet the cost is very high: businesses are losing profit from their services which inevitably hinders growth. The process is clunky and restricts access to other funding. Directors are forced to take out unwelcome Personal Guarantees that muddle the process even more. This is not what SMEs who are running flat out in order to grow need. They need dynamic, flexible finance that offer bespoke solutions to their requirements.

That isn’t to say there aren’t any positives at all to invoice discounting and factoring; it certainly improves a business’s cash flow whilst suppliers can still continue to maintain a direct relationship with customers. Yet the biggest drawback of invoice discounting is how difficult it is to escape from. Once a business enters an arrangement with a provider, they become reliant on the cash flow injection and the debilitating cost of the facility inevitably means they become hooked: it is no wonder it is referred to the crack cocaine of business finance.

Finance has been crying out for diversification and, fortunately, there are some alternatives to be found in the Alternative Finance sphere. “AltFi” is providing the finance that businesses actually need, the finance that’s appropriate to individual SMEs. Directors forced into invoice discounting by an inability to secure a term loan have been able to find a loan through platforms like Funding Circle or ArchOver, which allow them to plan ahead rather than be constantly tied down. At the other end of the scale, Platform Black and Market Invoice offer single invoice discounting which allows businesses to keep control of their invoices, improving the cash flow whilst continuing to grow. However, this does come at a cost. UK Exim provides SMEs engaged with import and export with order book trade finance.

This is the transformation that SMEs need, and the UK economy will benefit from it.

Green Energy for SMEs

Author

Angus Dent

Date

21st October 201517th May 2016

An article in the Telegraph last week highlighted the good news that that economic growth and carbon emissions had “uncoupled”, as the world economy grew 3.3% whilst carbon emissions practically stalled. The UK economy will be further boosted by the growing investment in low-carbon technology, and UK SMEs should aim to grab some of the windfall by implementing alternative sources of power into their businesses where possible. The distribution of UK renewable energy projects is broken down below.

The fast-growing market, which has seen prices drop continually since 2006, has been helped by the improvement in the technology of “green” energy options on offer to customers and businesses in the UK. For instance, even solar energy is proving to be surprisingly successful in the UK, proving to naysayers that had written off the technology as ill-suited to flaky British weather. According to research published in The Guardian, the number of solar installations in the UK almost doubled in 2014.

However, the increase in supply doesn’t always make it cheaper for businesses looking to “go green”. Solar again is the best example: the price of solar photovoltaics (PV) has plunged which has meant the price per watt of electricity is cheaper. However, the government had previously helped install the technology for users of solar powered electricity as well as giving feed-in tariffs, beneficial tax breaks and a handy buy-back of unused power to boot. As these remunerations have been redacted slowly over time, the cost is rising again and SMEs who should be being urged into using green energy are unable to commit financially.

The traditional thinking has been that the affordability of green technology needs to be matched by efficiency that rivals the traditional power sources. However, as efficiency and profitability is enhanced, there is still a need to subsidise the cost and give tax breaks to companies (particularly SMEs) who are using carbon-neutral energy. Avoiding the need to force businesses into over-zealously categorised regulation whilst simultaneously encouraging green energy is something that Amber Rudd and her successors have to prioritise in a bid to ensure that economic growth and carbon emissions stay “uncoupled”. The Telegraph article ends with a stark warning from Bank of England governor Mark Carney that “in the fullness of time, climate change will threaten financial resilience and longer-term prosperity”. The long-term apocalypse that Carney warns us of, namely the inexorable rise of the Earth’s temperatures, can be prevented by near-term solutions that benefit small businesses in the UK.

Peer to Peer Lending Regulation: the benefit for SMEs

Author

Angus Dent

Date

9th October 201517th May 2016

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A recent article written by Dr Avinash Persaud of Intelligence Capital caught my eye this morning in which he discussed the major issue of financial regulation and the difficulties facing SMEs in trying to raise finance through the traditional lending avenues. Persaud is a well-qualified source of knowledge: a former governor of the London School of Economics, a former member of the UN Commission on Financial Reform and a visiting scholar in both the European Central Bank and the International Monetary Fund, as well as the Chairman and former employee of a range of private, public and investment banks. The article is written for an Indian digital newspaper, but it certainly is written from a global outlook. It can be found here: http://www.livemint.com/Opinion/fQpaevJ8DX7KUpwBVdeXQK/Crowd-financing-is-not-banking.html

I have identified two important points from his article. Firstly, he is at pains to highlight the importance of facilitating finance to SMEs to drive economic growth, and he recognizes that banks cannot be expected to provide all of the finance. He recognizes that “a large part of the problem of financing development is not the absence of cash but an inability to mobilize it“. In my view, this is the result of the lending vacuum left in the wake of the Basel III rulings that ensure banks must have proportionately more capital in the bank when lending to small businesses than they would lending to more established businesses, tying up more of funds than banks would like. Dr Persaud recognizes the need to “use technology to match untraditional borrowers with untraditional lenders and provide opportunities for diversification and other forms of risk and information management.” Persaud fails to recognize that the bulk of the lending can come from institutions who will pledge alongside individuals on the same terms. Dynamic, flexible and secure Peer to Peer (P2P) crowdlending platforms that are properly regulated will fill the SME lending vacuum, facilitating finance from SMEs from a range of institutions and investors whose money would otherwise be unavailable to borrowers.

This leads me to the second main point: regulation. I think Dr Persaud is right to highlight the importance of differentiating lending platforms from traditional banks, a job that the regulators must do to ensure that prospective lenders know exactly what the risks are. The P2P industry itself wants FCA regulation for clarity as much as credibility. Regulation needs to be a long, drawn-out process to avoid simply bracketing it with banking regulation. Persaud reasons that “regulating crowd financing platforms as a bank and not an exchange would not only undermine the point of it, but would create systemic risks”. However, Persaud’s belief that P2P alternative finance platforms should drop “conventional” nomenclature is not necessarily the answer. I disagree with his statement that the banking terminology “Market Place lending” shouldn’t be used by alternative finance P2P lenders because that is exactly what is on offer to SMEs wishing to borrow money and individuals willing to lend.

In the words of Dr Persaud, “moving to the next level of social and economic development depends on these borrowers getting through”, which in turn depends on regulated Peer to Peer crowdlending platforms facilitating the finance from a range of savvy individual and institutional investors.

Productivity, Interest Rates and SMEs

Author

Angus Dent

Date

6th October 201517th May 2016

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Last week, the Office for National Statistics (ONS) announced that productivity in the UK grew at the fastest rate in four years, finally exceeding the pre-economic crisis levels of 2007. A rise in productivity is significant because it is seen as a crucial measure of an economy’s strength and future GDP growth, taking in to account living standards, capital and labour resources. For too long the UK has lagged behind the other G7 countries in terms of productivity: this looks set to continue despite the good news, as gains in productivity are offset by persisting low confidence in UK manufacturing. The incoming UK minimum wage hike will also have a marked effect on productivity as labour hours will cost businesses more.

So what is the effect of macroeconomic productivity on small businesses? Productivity is a key measure that the Bank of England uses to determine interest rates, which are currently kept at record lows. There has been a huge amount of speculation as to when the interest rates will be increased and this news should support those who think a rate hike will be sooner rather than later. Small businesses looking to borrow money will be amongst those monitoring the situation, particularly those with loans with a variable rate. However, the Bank of England typically follows the lead of the US Federal Reserve when altering the interest rates, and it is hard to see any great change any time soon. In the current uncertain global financial and geopolitical climate, analysts are not predicting the first rate rise until spring next year. When that does happen, Mark Carney, the Bank of England’s governor, has stated that increases will be “limited and gradual”. Any changes will take time to filter through to the real economy and SMEs in particular.

A raise in productivity is undoubtedly a good sign the UK economy is finally dragging itself out of the doldrums, yet we are still 18% worse than we would have been if the pre-crisis productivity rates had been maintained. It is not just a case of everyone working a bit harder; investment in public infrastructure and fiscal policy will be the defining factors that will hopefully see the UK catching up with everybody else. Small businesses can expect to benefit from increased productivity and subsequent better living standards for its workers, but should be carefully monitoring an imminent interest rate hike when budgeting for the next couple of years.