Why Do So Few UK Businesses Use Invoice Finance?

Recent figures from the Asset Based Finance Association report that as at September 2009, just 42,983 UK businesses use invoice finance provided via their membership. This represents just 0.73% of the total number of UK businesses currently listed in Dun & Bradstreet’s Marketplace of UK Businesses Database.In order to try and find out the reasons for this low take up of invoice financing, we commissioned a piece of research that involved telephone interviews with 100 SMEs (Small & Medium Sized Businesses) to better understand their attitudes to invoice finance.We asked those businesses:”Why do you think that so few businesses in the UK use invoice finance?”Research ResultsThe results were as follows:41% said due to cost.31% said that it was not promoted enough and businesses hadn’t heard of it.18% said it was easier to use overdrafts or loans.10% said it was due to the bad reputation they associated with using the products.Those are interesting answers as they demonstrate how poorly promoted these products have been, and how widespread misunderstandings about these products are.Analysis of Those ResultsTaking each response in order, there are some key points that businesses seem to have misunderstood.41% – CostWe recently constructed and published a factoring savings calculator that demonstrated how a business could use factoring (a form of invoice finance) and achieve savings that would more than offset any fees incurred and could create a net cost reduction to the business. These savings are made possible through using the outsourced credit control function that comes with factoring and by seeking supplier discounts for cash payments made possible by the cash released from factoring.31% Not Promoted Enough / Hadn’t Heard Of ItThis lack of promotion of these flexible working capital products, by the invoice finance industry, is clearly something that is contributing to the low take up of these products and the lack of understanding about how these facilities work.18% Easier To Use Overdraft Or LoansThere are several points to consider here.Firstly, the amount of work required of a client to run some invoice finance facilities is absolutely minimal. There are products on the market that have eradicated the need for reconciliations and technological developments mean that invoices can often by uploaded electronically, and automatically, straight from the client’s sales ledger package. The client can even choose to have cash transferred to their account as it becomes available so they don’t even have to request it.Even if we assumed that overdrafts were easier to use, there are a number of advantages of invoice finance over overdrafts and loans:* Overdrafts and loans do not grow in line with growth in business turnover whereas invoice finance does.* The level of funding released by invoice finance is likely to exceed what can be raised through overdrafts and loans.* Overdrafts and loans often require a net worth in the business and a profitable trading history whereas invoice finance can be available to loss making businesses even thought they have a negative net worth.10% Bad ReputationA small number of respondents felt that using invoice finance could be bad for their reputation if other businesses knew about it. I would argue it could also be good for their reputation, as their cash flow will improve, but taking their concerns on board there are facilities available that are completely confidential. The client’s customers will not be aware that they are using it and this overcomes any concerns they may have.SummarySo in summary, there appears to have been little promotion of invoice finance in the UK and hence little knowledge of invoice finance is evident amongst UK businesses. This together with a great deal of misunderstanding about the facilities that are available under the banner of invoice finance is probably what is currently causing the low level of take up of these flexible forms of working capital finance.

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