How small businesses can unlock the cash in their invoices

Changes in the law could help small and medium-sized enterprises unlock substantial sums tied up in their invoices.


Kelly Tolhurst: giving SMEs a helping hand
(Image credit: Copyright (c) 2015 Shutterstock. No use without permission.)

A change in the law will ease a major headache for small firms, says David Prosser.

Changes in the law could help small and medium-sized enterprises (SMEs) unlock substantial sums tied up in their invoices. Ministers have unveiled proposals to ban contract terms preventing SMEs working for larger firms from raising finance against invoices issued for the job.

Such clauses are routinely inserted into many sales contracts as part of efforts to prevent sub-contracting and protect confidentiality. But it means smaller companies miss out on a potentially valuable source of capital.

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The proposals, set to become law by the end of the year, come as invoice finance continues to boom. This type of funding, increasingly preferred by many SMEs to bank loans or overdrafts, enables firms to sell unpaid invoices to a finance provider, giving them access to most of the money owed long before the bill is finally settled. Figures from UK Finance show that invoice-finance advances rose by around 5% last year at a time when traditional bank funding for SMEs was falling. The total stock of invoice finance to SMEs is roughly £9.5bn.

The growth in the industry reflects changing attitudes to this type of funding. In the past, invoice finance was often seen as a last resort amid fears customers would regard such arrangements as a sign of financial weakness.

However, as new types of invoice-finance contracts have developed, often enabling SMEs to keep complete control of their customer relationships, businesses have focused on the advantages of funding in this way.

One potential benefit is that invoice finance is often more affordable than traditional funding. Though invoice-finance providers take a fee for the service they offer, this can be cheaper than paying interest charges on a loan. Another attraction is the potential flexibility of invoice finance. SMEs negotiating bank loans or overdrafts typically have to agree facilities of a set size and renegotiate if their needs change with applications considered on the basis of their past trading. By contrast, invoice finance is more scalable. As firms grow and issue invoices for larger sums, the pool of funding available automatically grows with them.

Leading players in the sector report substantial growth in recent years as attitudes to alternative finance have changed. For example, research by Close Brothers Invoice Finance suggests that 73% of SMEs are now open to the idea of using invoice finance.

Nevertheless, many SMEs have hitherto been restricted in their use of invoice finance by their contracts with larger businesses. That has proved particularly galling for many SMEs given the poor record of many big companies on settling their invoices on time. Small-business minister Kelly Tolhurst has described such contracts as unfair and pledged that any agreed from 31 December 2018 onward would have no legal impact on invoice finance.

Are you vulnerable to cyber-attack?

Cyber-criminals launched five separate attacks on the average small business last year, confounding the widely held view that larger businesses are more at risk of a damaging breach or data theft. Cyber-security specialist Appstractor said 17% of SMEs in the UK had been attacked at least once over the past 12 months.The average firm faced five attacks.

The research underlines the warnings of cyber-security experts who have consistently warned that criminals think SMEs offer potentially lucrative opportunities. While many SMEs regard themselves as low-value targets compared to blue-chip companies, they also tend to have less sophisticated defences.

Security advisers want SMEs to take cyber-security more seriously. In part, that means investing in up-to-date IT protection, including good-quality basic defences such as anti-virus software and strong firewalls.

But it is also important to focus on people and processes, ensuring that staff understand potential cyber-security risks and how to counter them.

That includes not opening email attachments from unknown sources and raising awareness of new scams. One such scam is CEO fraud, where staff receive emails purporting to be from senior executives ordering them to transfer funds to a third party.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.