Sunday, August 21, 2011

Time for the Government to Promote Other Cash Flow Solutions

The Federation of Small Businesses has published a new report suggesting the decline in traditional lending means the government should be promoting alternative forms of business finance.

With overdrafts and bank loans becoming increasingly difficult to access for smaller firms in particular, as evidenced by the failure of Project Merlin to stimulate bank lending, the business organisation highlighted the role non-bank finance providers have to play whilst long-term reforms were made to the UK's banking system.

FSB national chairman, John Walker, said: "We need to accept that in its current form, our banking structure might never fully cater to the needs of the UK's business community. We need to build alternative routes that connect savers and investors with viable small businesses ... and thereby introduce innovation and competition into the sector."

Yet the infrastructure is already in place. Asset based finance companies have taken up the mantle of providing funding support for UK businesses in recent years as the majority of other forms of funding have seemingly gone into reverse. According to the Asset Based Finance Association (ABFA), advances made to clients rose annually by 9% to £16 billion in the third quarter of 2011 alone, with the next set of quarterly figures due next week expected to show a similar improvement.

Asset based finance releases cash against a range of business assets to improve the client's cash flow. Whilst invoice finance releases up to 90% of an invoice's value just 24 hours after it is raised to overcome the cash flow gap associated with trading on credit, facilities can be extended to release cash against stock, property, plant and machinery amongst others. Bad debt protection can also be incorporated in order to safeguard the business against late payment or protracted default.

That the FSB alluded to this funding method in its report, where it argued the government should consider incorporating asset based finance into its £1 billion Business Finance Partnership fund, is encouraging, but here at Hilton-Baird Financial Solutions we believe it's right the government spends time promoting invoice finance solutions such as factoring and invoice discounting in their own right.

Educating businesses as to the full range of cash flow solutions available to them is crucial to the country's economic recovery. Only by changing the mindset of business owners who approach their bank for traditional funding sources by default can we ensure firms of all sizes have access to the funds they urgently need.

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