The Government has announced a new initiative to help diversify business finance which will be led by UK industry experts from both the business and finance sectors.
UK businesses still rely heavily on bank funding to help finance their business activities even though there are many alternative sources of funding available to them in today’s ever changing financial marketplace.
The Government wants to ensure, in light of recent and current banking reforms, that the flow of finance to businesses is maintained. Alternative sources of finance will be crucial to help businesses deliver the wider economic growth the UK economy needs.
The panel of experts will seek to establish a framework of alternative finance sources by working with businesses and business investors, financial institutions and providers of alternative finance to coordinate and facilitate the availability of funding that businesses need.discounting
Bank lending
Even though there has been a recorded increase in new lending from the largest banks this year many businesses are still unhappy with bank lending levels and how they have been treated by their banks.
Tighter lending criteria, non-renewal of overdraft facilities and poor communication by the banks are the common problems cited by businesses as making their funding objectives difficult to achieve.
Without the finance they need, UK businesses struggle to survive and grow, and so the UK economy does the same. This is why the Government is not only introducing schemes to increase bank lending but is also keen to encourage as much competition in the financial market as possible and provide a wide range of alternative sources of finance to UK businesses.
Alternative finance
There is already a wide range of alternative finance sources available to businesses.
One of the biggest barriers to increasing the take up of these sources of finance is simply general awareness. New and emerging providers of alternative financial products do not have the branch infrastructure that makes for the efficient and effective distribution of their products.
The other important factor here is that many owners and managers of small and medium sized businesses, which are the backbone of the UK economy, are unaware of the range of alternative finance available and where to find it.
New methods of communication are required and it is hoped this will be a key objective of the Government’s initiative.
Invoice Finance
Invoice finance is one of the most popular options in the alternative finance portfolio and has grown over the last fifteen years from about 13,000 companies using it in the UK to over 50,000 companies now.
This extremely flexible method of business finance advances funds against unpaid sales invoices. There are variations within the invoice finance family of products which includes invoice factoring and invoice discounting.
The invoice finance lenders will advance up to 95% against a company’s unpaid sales invoices and use the sales ledger as security by taking assignation of the invoice and so the outstanding debt is effectively owned by them.
When the invoice is paid by the company’s customer the invoice finance company will pay over the balance of the invoice that has not been funded after deducting their fees. There is usually a charge for the facility and an interest charge for the amount of funding advanced.
One of the main benefits of invoice finance is that the facility will grow as the business grows thus making it a very effective method of funding working capital.