As firms navigate the challenges of resuming operations in a post-COVID world, many are seeking alternative financing tools. Invoice financing is a popular avenue for tech firms planning to scale up.
The lifeblood of any business is cash flow: solid cash flow means the firm can dynamically adjust to whatever happens, whereas when cash is limited, so too are options. This can be challenging for any growing company, but the pandemic only exacerbated the financial vulnerability that already existed for small firms looking to scale up.
Supply chains were interrupted, delays on orders caused significant disruption, and many businesses simply struggled to stay afloat. The Federation of Small Businesses estimated that over 62% (three in five) of Britain’s 5.9 million small businesses reported “late or frozen” payments throughout the pandemic.
As a result, record levels of smaller businesses sought external financial support last year, according to research from the British Business Bank. Almost half (45%) of SMEs applied for external financial support in 2020, compared to 13% in the previous year. More demand is anticipated throughout 2021 as businesses aim to move on from the pandemic.
Historically, businesses have turned towards investors and their banks for finance. Yet, the pandemic has placed many companies into increasingly precarious positions that can be off-putting to traditional investors. Many businesses already stretched credit options to the limit during last year’s turbulence simply to survive.
For those businesses, the top priority is resuming full operations on tight budgets. However, other companies have come out the other side of the pandemic seeking to scale up. Scaling could mean anything from beginning international trade, introducing a new product line, or updating their payment technology systems to address customer demand.
Whatever route scaling takes, it typically requires finance. In a post-COVID world, firms are looking towards alternative financing sources as they embark upon their scaling plans, especially tech firms operating in competitive, fast-paced environments where the first-mover advantage is often a significant factor in subsequent growth.
Scaling up is famously a tough time for a business. 57% of scale-up leaders reported moments of deep uncertainty when they feared their business would fail, and there is a well-documented scale-up support gap. To bridge this gap for growing tech firms, one of the most popular forms of alternative finance is invoice financing.
With this route, businesses can secure some immediate payment of invoices, which can be reinvested as quickly as possible. Advancing finance against invoices enables enterprises to improve their cash flow as the cash is generally available straight away.
Invoice financing also offers more generous payment terms to scaling borrowing. It is simpler to secure than other forms of funding, making it a fast and straightforward way for businesses to access funds immediately. It also does not matter if the business has a small number of customers. In contrast, a common issue when small businesses apply to banks for credit is the concentration risk that comes with a smaller number of buyers.
Unlike traditional debt factoring, the business can choose how many and which invoices they use. It might be once a year, or it might be every invoice they send, giving them access to funds when they need it without incurring fees on every invoice or being forced to finance an ongoing credit line. This relieves growing businesses of the pressure to chase payments while providing almost immediate access to much-needed cash.
Generally, the model works exceptionally well for smaller businesses serving larger corporate clients. Usually, particularly when dealing with industry giants, these firms might have to wait 60 to 90 days before invoice payment. If they decide to pursue traditional forms of finance in the meantime, this could take weeks with lengthy application and vetting processes. Invoice financing can take less than 48 hours.
It is not just the speed and simplicity that make it a game-changer for growing businesses.
Crucially, invoice financing means that companies can quickly expand the total capital available to them without impacting their ability to borrow or attract investment, as it does not affect their debt-to-equity ratio.
This means that companies do not simply have to settle for resuming their operations but can also thrive and scale. Invoice financing means that they are free to simultaneously access credit or pursue traditional forms of investment to fuel further growth. While a tech firm might use invoice financing for their short-term scaling plans, they could also simultaneously pursue venture capital for longer-term growth.
While scaling up can be a key innovation driver, it does not come without growing pains, which robust cash flow plays a significant role in alleviating. This is why invoice financing can be a critical tool in helping tech firms scale up in a post-COVID world, ensuring that they not only survive but go on to thrive.
By Ian Duffy, CEO of Accelerated Payments.