During 2020 and 2021, many governments provided financial support to businesses, including loans, to help them through the Covid pandemic. As these pandemic loan schemes are repaid, there will be opportunities for private sector lenders to offer alternatives, as this article explains.
During the pandemic, companies that had some or all of their staff on furlough generated little value – in other words, not much in the way of assets, whether tangible (manufactured items) or intangible (services provided). To fire up their business as government support schemes are repaid, companies need working capital, in order to buy in resources, sell the resulting goods and services, and eventually receive payment. At the same time they’re faced with the repayments that become due on government loans such as the UK's CBILS and BBLS, as well as all their other costs such as salaries. Businesses will need all the help they can get.
This means a flood of new customers for invoice finance and leasing.
There are some challenges. The small and medium enterprise (SME) market isn’t the easiest for lenders. The processes for origination and servicing are comparatively complex and expensive.
But, on the positive side, the risks aren’t as great as they might seem at first. Leasing and invoice finance are good solutions for lenders and brokers. They are secured, so if a debtor ceases to trade, in the main the lender will get the money back from the asset or invoice(s), and the lender ranks ahead of many other creditors. Losses from leasing and invoice finance are typically 0.5–3%, which is rather better than a bank would suffer with unsecured bad debts.
So there are products that are appropriate to meet the coming demand. How about delivering them?
Time to cash is critical to the survival of many companies. It’s no good if the company fails because the lender took too long to process the loan application. Typically at present, a business owner, often with the help of a broker, must spend 30 hours applying for a loan, and time to cash can be 90 days or even longer. The lender’s time is swallowed up by processes that involve moving paper forms, invoices and documents around, hunting for enclosures in email inboxes, and re-keying information to move it from one part of the application and origination systems to another.
Multiply that many times, and it’s clear that current processes won’t manage the flood of demand – and their slowness could even be a threat to the survival of many businesses.
Factoring has the extra complexity that, every time the business issues an invoice, it must be stamped and assigned to the factor, who effectively holds the sales ledger on behalf of the client, and then has to chase up the debts. It’s laborious and time-consuming.
But digitising and automating can make a huge difference.
If the sales ledger is assigned as a whole, digitally, then things become far easier. The loan can be based on the value of the ledger as a whole, avoiding the need for an administrative overhead per invoice. The process can be set up to highlight late payments, enabling the factor to manage the exceptions, rather than managing every single invoice.
Assigning the sales ledger is just one aspect that can be digitised and automated – the whole application and origination piece can be as well. A lending platform supports all of this. The Trade Ledger platform is a good example. It brings together all the data needed throughout the lifecycle of a loan, from the borrower’s accounting system, the lender’s core systems, and from third-party data providers. It provides analysis, automates processes, and provides dashboard information so everyone can check the status of both individual accounts and the processes.
The Trade Ledger platform reduces the time required to apply for a new loan from the typical 30 hours, to just minutes. Time to offer can be as little as an hour, with initial drawdown in under a day – compared with 90 days for traditional lending processes. And time to cash can be as little as a day.
Isn’t it time that invoice finance became less intrusive and more transparent, and supported SMEs in their greatest time of need to help the economy thrive?
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