How invoice finance can help SMEs through uncertainty

Ian Cole, Head of Invoice Finance in the UK & Ireland, Siemens Financial Services, examines the cash flow pressures faced by SME manufacturers and how invoice finance can help.

The UK manufacturing sector is facing a period of uncertainty. Despite a recent modest improvement in output, with growth improving marginally in September 2018 compared with August,[1] the average level of output recorded over the three months to September was the weakest since June 2016 (just before the EU referendum).

Another report, the CBI’s recent Trends Survey[2], found that output and new orders growth among the UK’s small and medium-sized (SME) manufacturers picked up in the three months to July 2018. Despite this, however, the sector – like many others - is facing a period of waning business confidence and experts believe it could see a slower pace of growth in the coming months.[3]

SMEs are the most exposed, as a recent survey by The Manufacturers’ Association, Make UK (formerly EEF) found. 26% of small firms agree that a low but volatile exchange rate provides their businesses with more risks than opportunities, compared to 23% and 22% respectively for mid-sized and large companies. Brexit has also led to uncertainty surrounding the future relationship of the UK with the EU on the renewal of long-term contracts and agreements.[4] For small businesses, which generally rely on fewer customers and have access to smaller cash reserves than larger companies, these circumstances can pose significant challenges.

SME manufacturers who want to succeed in the coming months and years will need to be resilient and have growth strategies in place. SMEs are understandably keen to know how new regulations as a result of Brexit will affect them. Changes to tariffs, border controls and possible delays in importing goods are all to be considered. Some manufacturers will be already be looking to build reserves and stockpile raw materials as solutions to these potential issues. Similarly, European customers may want to stock up on complete products which could lead to higher demand.

A recent study[5] found British manufacturers are actively forging new relationships with rest of the world territories and this shift in focus from the EU is expected to result in the acceleration of AI and automation within British factories. This should enable companies to better compete on a global scale following Brexit.

SMEs will want to capitalise on these opportunities in order to safeguard their growth plans although this can be reliant on new investment. This can be particularly difficult for SMEs who may not have access to budgets comparable with their larger counterparts.

Our research[6] shows that SMEs tend to suffer from slow and/or late payments disproportionately due to their position typically towards the end of the supply chain.  Businesses with an annual turnover of under £1 million wait on average 72 days for invoices to be paid.[7] Businesses with an annual turnover of between £1 million and £10 million wait on average 53-54 days.[8] This is significantly longer than the largest businesses, which typically wait 48 days.[9]

All of these challenges contribute to increased pressure on SMEs’ finances, as they decide where investment is best directed and how it can be funded. Nevertheless, there are solutions to help them manage their cash flow. Invoice finance, for example, can enable manufacturers to leverage unpaid invoices to unlock funding. By using invoice finance, when a company invoices their customer, up to 90% of the approved invoice total is immediately advanced by the finance provider, with the remaining 10% paid once their customer settles the balance.  Whilst companies will still need to ensure the eventual payment of their customers’ invoices, invoice finance provides the company with essential working capital so it can then invest in expanding its business without having to wait for bills to be paid.

Invoice finance companies now provide more funding than ever before to SMEs with funds used across the UK totalling £21.6bn in the first quarter of 2018.[10] Access to more working capital can ease the pressure on SMEs in the manufacturing sector and potentially allow them to increase investment in areas such as new technology, developing new products, entering new markets or hiring new staff, for example. By deploying their capital where it’s most required businesses can improve their productivity and maximise their competitiveness, ensuring they are prepared to take on new projects and seize new opportunities.. SME manufacturers are facing uncertainty as a result of Brexit and growing competition from operating in a globalised market. But these circumstances also bring opportunities, for example, of building relationships with customers in new territories. Invoice finance can help small businesses leverage their unpaid invoices and unlock investment which can be used to seek new prospects and subsequently stimulate business growth.

[1] IHS Markit/CIPS UK manufacturing PMI, New release, 1 October, 2018, https://www.markiteconomics.com/Public/Home/PressRelease/3b66306ed7584d15a46aad546e0c0a42?s=1

[2] CBI, Strong growth for SME manufacturers, 1 August, 2018,  http://www.cbi.org.uk/news/strong-growth-for-sme-manufacturers-but-labour-skills-shortages-bite-cbi/

[3] The Guardian, CB wans that Breixt uncertainty will bring output growth to a standstill, 24 October, 2018,  https://www.theguardian.com/business/2018/oct/23/cbi-urges-government-to-end-damaging-brexit-uncertainty

[4] EEF Executive Survey 2017 www.eef.org.uk/resources-and-knowledge/research-and-intelligence/industry-reports/executive-survey-2017

[5] https://readyforbrexit.co.uk/the-uk-manufacturing-industry-is-preparing-for-a-no-deal-brexit/

[6] Siemens Financial Services, ‘Mind the Payment Gap’, 2017 https://www.siemens.com/uk/en/home/products/financing/working-capital-finance/invoice-discounting.html

[7] Asset Based Finance Association (AFBA), Smallest businesses waiting longer than ever for payment, 13 July 2015, http://www.abfa.org.uk/news/97/Smallest-businesses-waiting-longer-than-ever-for-payment

[8] ABFA, Late Payment: An Analysis by Sector, 01 May 2015, https://www.abfa.org.uk/news/92/Late-Payment:-An-analysis-by-sector

[9] ABFA, Late Payment: An Analysis by Sector, 01 May 2015, https://www.abfa.org.uk/news/92/Late-Payment:-An-analysis-by-sector

[10] ABFA, UK businesses secure record amount through invoice finance - breaks GBP 20bn barrier for first time, 05 September 2016, http://www.abfa.org.uk/news/125/UK-businesses-secure-record-amount-through-invoice-finance-breaks-GBP-20bn-barrier-for-first-time#sthash.csJjUmHO.dpuf