How can SMEs optimise working capital for growth in 2024? Invoice finance, revolving credit facilities, ABL and more
Cash is king – and in an age of still higher-than-normal interest rates and late payment issues, working capital management is more important than ever.
It is also crucial for growth: recent research from Citi found that firms which consistently shorten their cash conversion cycles see greater returns on their investment capital than those who consistently lengthen them. One of the main drivers of shortened cycles, they discovered, is improved days outstanding.
Meanwhile, those who fail to manage the cycles of receipts and payments may face some version of the fate that befell Carillion in 2018. As well as taking on high-risk and unprofitable contracts, the construction giant faced major payment delays in the Middle East, living on supplier finance and racking up debts of £900m.
Fortunately, there are solutions. More and more alternative lenders are bringing to market innovative working capital solutions, while Open Banking data and sophisticated AI applications are making it easier than ever to underwrite the risk of SME borrowing.
Invoice finance
Late payments to global suppliers have surged over the past two years, according to recent research by working capital solutions provider Taulia. The study, which polled 11,968 companies, revealed that more than half of the respondents routinely experienced delayed payments from their customers, while an increasing number of companies report payment delays exceeding 45 days.
Chemicals and machinery were the two worst affected sectors, with nearly 60% of firms in these industries reporting on average their invoices were paid more than 30 days late.
Invoice finance cushions firms against tardy customer payments by unlocking cash tied up in outstanding invoices, often within 24 hours. Some providers, such as Bibby Financial Services, can even unlock 100% of the invoice’s value.
From legacy banks through to disruptive alternative lenders, businesses are spoilt for choice when it comes to invoice finance providers:
- Kriya – A streamlined, user-friendly approach
- Growth Lending – Ideal for international businesses
- Skipton Business Finance – Best for its interest-free finance offering
- Metro Bank – Offers zero cancellation penalties
- Royal Bank of Scotland – Prides itself on a high level of customer support
- Bibby Financial Services – Unlocks 100% of invoices’ value
- Sonovate – Best for recruitment agencies
- Aldermore – Best for industry-specific, flexible funding options
- Close Brothers – Best for medium-sized to large businesses
- Natwest – Offers invoice discounting, specialising in the haulage and recruitment sectors
Revolving credit facilities (RCF)
For those businesses requiring a facility that can smooth over uneven trade cycles and aid sales expansion, revolving credit facilities may be ideal. An RCF offers a fixed amount of capital to borrow which can be used to fund purchases, expansions, or make emergency payments.
What makes a RCF different from a traditional loan is its cyclical nature. It allows borrowers to repeatedly access funds within a set credit limit: users can draw money as needed, begin repayments, and then borrow again before the initial amount is fully repaid. This cycle can continue indefinitely, providing flexibility to businesses that may require intermittent access to capital.
Compared to repayments on a fixed term loan, the revolving credit facility is often a cheaper alternative for businesses if used as intended – drawing down funds as needed and paying funds back incrementally, before the 12-month term ends.
Lenders will generally charge upfront fees, commitment fees and drawdown margins. The latter refers to the interest charged on what’s actually drawn by the borrower, which is typically priced as a benchmark interest rate (LIBOR) plus a spread. Commitment fees are fees charged on the undrawn portion of the credit facility.
Some revolving credit providers in the UK include:
- Reparo Finance – Best for firms seeking flexible access to £25,000 – £75,000 over the course of a financial year
- iwoca – Offers up to £500k over 24 months
- FIBR – Offers 12 monthly lines of credit between £10-£250k in facility size with a 4-17.5% drawdown fee
Merchant cash advances (MCA)
Merchant cash advances are becoming ever more popular amongst SMEs, amidst high volumes of credit card transactions and the need for short-term cash flow.
With an MCA, lenders provide businesses with an upfront sum of money based on a percentage of their anticipated future sales. The business then repays the advance plus fees over a set period, typically through a percentage of their daily or weekly debit and credit card transactions.
It can be a viable option for businesses (such as those in the retail or e-commerce space) with strong credit card sales and a need for fast access to capital.
But businesses should proceed with caution. Merchant cash advances have gained a reputation for being predatory, often coming at a high price: lenders typically calculate the amount you must return by multiplying the amount of funding by a factor or multiplier – which often sits between 1.09 and a hefty 1.50. The concept of selling future sales is also inherently risky, especially in industries most susceptible to economic downturns such as retail and hospitality.
Some MCA providers in the UK include:
- 365 Finance
- YouLend
- SumUp
Asset-based lending (ABL)
Asset-based lending (ABL) has become a popular source of financing in recent times, with Investec’s Private Equity Trends 2024 report indicating almost half (48%) of PE General Partners now see ABL as their second or third choice.
ABL enables asset-rich borrowers to monetise those assets, allowing companies to unlock working capital. It operates on a formula-based model, with borrowing capacity determined by the value of the pledged assets. For instance, a borrower may have an ABL credit facility that permits borrowings up to 90% of their eligible accounts receivable and 75% of their eligible inventory.
Typically, an ABL revolver is larger in size compared to a standard revolving credit facility (RCF) – this is because the former is secured against an underlying asset base, providing the lender with greater assurance.
Also, while an RCF usually requires a full repayment to zero at specific points during the year, ABL can be lent on a perpetual basis, with the availability of financing expanding and contracting with the corresponding availability of a company’s assets.
This flexibility makes it particularly attractive to companies operating in a seasonal and/or cyclical industry (e.g. retail, distribution or manufacturing), or companies who would benefit from loan structures with fewer financial covenants.
Some ABL providers in the UK include:
- Shawbrook
- White Oak UK
- Aldermore
