Why your small business needs invoice finance

There are a number of definitions for invoice finance, but The British Business Bank (BBB) succinctly describes it as ‘using unpaid invoices as security to gain quick access to a percentage of their value’. With the UK’s inflation rate currently at more than ten per cent and both online stores and retailers being affected by issues including shipping and supply chain interruptions, invoice finance might just be the solution for many businesses.

Invoice finance facilitates the connection between businesses and private investors. SMEs’ (small to medium-sized enterprises) working capital can be optimised and they are therefore enabled to prevent any supply disruptions caused by fluctuating market prices. Extending the availability of credit to lower-risk classes by bringing them together with investors with a higher risk appetite is one option worth considering, especially institutional investors who otherwise would have had no access to SME credit. It provides credit to high-quality prime borrowers when traditional banks are not in a position to do so. This may be because of a lack of data for assessing the risk appropriately. In a tight liquidity situation, speed can make all the difference to an SME. COVID-19 significantly affected the trade and trade finance ecosystem whereby SMEs engagement in trade deals were increasingly under pressure due to a lack of demand as well as side issues relating to supply. 

In July of this year, the global supply chain pressure index reached 1.48 points. This was 2.31 points in June 2022. The Russia-Ukraine war and COVID-19 lockdown measures in China resulted in an index rise in April 2022. Chinese restrictions have been eased in the intervening months resulting in a decrease in pressure on the global supply chain. However, the pressure index scores were notably higher than before COVID-19. The UK Government’s current action plan for SMEs (2022-2023) includes prompt payment compliance to ensure suppliers pay their supply chain invoices in a timely fashion.

We have come to the point where business transactions simply cannot take place without the many benefits of technology. Quicker loan applications are often easier to obtain via online platforms than traditional bank credit. Because a physical visit to a bank branch is not required this can be completed from a customer’s place of business. Typically, far less paperwork is required. In addition to this, technology can harness already available customer data to speed up the process on behalf of the customer. The increase in the number of online service providers for identity verification means applications can be processed seamlessly and without delay. Digitisation can also impact the quality of trade finance assessments. New tools building on big data and AI (Artificial Intelligence) can support the credit assessment of smaller firms. These are often opaque if a long-standing relationship with a financial intermediary is not in place. 

UK businesses can utilise AI to spot risks or underperformance in their supply chain before they become problematic. It can also be used to map the supply chain of a business from the business’s direct supplier to their subsequent supplier and so on with more accuracy. A supply chain map that is as detailed and accurate as possible can clearly pinpoint the problem points. I feel if businesses can employ this particular technique they can alleviate potential problems and thus make their supply chain stronger.

A report on AI Activity by Capital Economics for the Department for Digital, Culture, Media, and Sport (DCMS) showed that around 15 per cent of UK businesses (432,000 companies) have adopted at least one AI technology. In 2020, UK companies who had already adopted AI spent a total of £16.7 billion on AI technologies. This worked out as an average spend of £9,500 per small business, £380,000 per medium and £1.6 million per large business. The report also found that businesses were more likely to use AI technology as they developed. 68 per cent of large, 34 per cent of medium and 15 per cent of small businesses were seen to have adopted at least one AI technology.

Such is the importance of AI that the UK Government is currently financing 1,000 PhDs in artificial intelligence as part of its digital strategy. It has also provided more than £1.6 billion for the aforementioned British Business Bank’s (BBB) regional funds. These aim to improve prosperity and sustainable growth across the UK by facilitating debt and equity to SMEs. 

I believe that new technological tools along with a variety of different data and information sources can yield results that go far beyond simple balance sheet statements if meaningfully interpreted. 

Morgan Terigi is CEO and co-founder of Singapore-based Incomlend, a global multi-currency invoice financing marketplace for businesses and private capital. For more information, see www.incomlend.com