Why the death of the overdraft doesn`t also mean the end for SMEs

While many may mourn the “death of the overdraft”, businesses, especially small and medium-sized enterprises, need not also be consigned to an early grave. Indeed, alternative types of funding, such as invoice finance, provide a lifeline in the battle to maintain cash flow needs and support monthly shortfalls.

That is not to say that the reduction in supply of traditional funding has not hurt SMEs, however. With strict capital adequacy requirements to adhere to post-crisis, banks have been forced to withdraw credit facilities and become much more selective in their lending. And as banks prioritise business with multinational corporates, this is having a devastating impact on SMEs.

Yet, these businesses must be nurtured. SMEs are crucial to the health of the economy, making up 99% of all businesses in the UK and contributing almost half the turnover of the UK private sector. Without access to finance needed to support their business needs, however, many face considerable challenges. While a large proportion may have strong cash flows on paper, 60% experience delayed payments and the average business is owed over GBP 38,000, meaning that a lack of suitable financing options at key moments in the credit cycle can have enormous consequences for even the most successful business.

Life after the overdraft

Fortunately, a host of alternative lenders have stepped forward, many of which are leveraging developments in technology to offer new, valuable solutions to the underserved SME sector. Indeed, the UK online alternative finance sector grew by 84% to reach GBP 3.2 billion in 2015 (up from GBP 1.74 billion in 2014), and alternative finance now accounts for 12% of the market for lending to small businesses in the UK .

Invoice finance (selective invoice financing in particular, which provides finance against individual invoices) is becoming an increasingly popular option and a valid alternative,and even a preference, to the overdraft. This type of funding facilitates immediate access to cash tied up in unpaid invoices (with some being financed even when they are already overdue), freeing up working capital and facilitating improved cash management capabilities. What’s more, it is also possible for the real-time data that has been made available through advances in technology to be used to gain a thorough understanding of companies seeking finance – resulting in a far more effective assessment of risk. Through such data insights, providers can be better-positioned to finance certain companies, and are therefore more likely to be able to meet the needs of those denied finance elsewhere. Indeed, it is a lack of information or understanding that often means SMEs are denied finance.

Alternative finance is increasingly being welcomed as a means of supporting SMEs. Indeed, with late payments a perennial issue, and overdrafts increasingly being consigned to the past, SMEs need to have a robust strategy in place that enables them access to affordable, flexible funding – and the working capital that allows them to do more than just survive, and instead thrive.

About Steven Renwick

Steven Renwick is founder and CEO of Satago. He established the business after experiencing the problem of late-paying customers in his family business. Prior to this, Steven was Director of Global Projects at Rocket Internet, one of the world’s largest eCommerce investment companies, helping to launch dozens of companies worldwide. Steven is a regular speaker on SME credit control and has written on the topic for a number of publications including the Institute of Directors Growing Business Handbook. He has an MBA from the University of Oxford and a PhD in Genetics from University College London.

About Satago

Satago is an all-in-one online finance and cash-flow platform offering finance and receivables management to microbusinesses and small- and medium-sized enterprises (SMEs). The fintech firm serves a large but under-served business segment in the UK, overcoming the issue of late payments by converting outstanding invoices into cash, and using innovative technology to give small businesses the same level of credit control as their larger counterparts.