4 reasons why invoice financing is more beneficial for SMEs than bank credit

Borrowing is becoming increasingly unaffordable and unobtainable for many SMEs. Recent reports have revealed more than four in five financial brokers agree major UK banks have lost appetite for lending to SMEs, despite increasing demand for funding.

However, in such a turbulent economy, businesses need to be able to access cash easily and quickly to boost cash flow. Poor cash flow management is the biggest killer of SMEs - it is the most common reason why small businesses fail (82 percent).

But with trust in high street banks dwindling, SME interest in alternative financing is becoming more prominent. In light of this, we explore why invoice financing is more beneficial than traditional bank credit.

Easier qualification

Across traditional lending formats, securing a loan is becoming tougher than ever. SMEs are experiencing a widespread increase in rejected applications across Europe for all loan categories.

SMEs must often rely on external financing to fund their operations, expand their businesses, and invest in new projects. But when loan applications are frequently rejected, SMEs face a lack of access to the necessary capital to grow and thrive.

This is particularly concerning for budding SMEs who may have an even tougher time securing a loan due to limited credit history or a lack of assets. These businesses may be considered too high a risk for traditional financiers since there is no collateral to offset this risk.

In these instances, invoice financing provides businesses with a more assured way to gain financing when they need it most.

Compared to bank loan applications, applying for invoice financing is straightforward. Banks typically have extensive documentation requirements, including financial statements, business plans, and other supporting documents.

By contrast, invoice financing applications may focus primarily on the unpaid invoices, shipping documents and the creditworthiness of the customer's buyer, making the application process much simpler for businesses that are not yet established enough to meet the strenuous requirements of a high street bank. 

Reduced risk

One of the great advantages of invoice financing is that it reduces a business's exposure to bad debt by assuming the burden of credit control.

When a business uses invoice financing, the financing company takes on the responsibility of collecting payment from the customer's buyers whose invoices are being financed. This means the payment is collected from the buyer, not the supplier. The financing company will perform credit control activities such as credit assessment, invoice verification and collection efforts and will protect suppliers from non-payment.

By offloading the credit control function to the financing company, businesses reduce the risk of bad debt, as well as the time and effort required to pursue late or non-paying customers.

By contrast, traditional bank credit means businesses are still responsible for managing accounts receivables and are not provided with the same level of protection.

Improved relationships

By using invoice financing, businesses can offer more flexible payment terms to their customers. Instead of demanding payment upfront, businesses can offer longer repayment terms while still receiving a cash injection from a third-party financier. This flexibility can help businesses forge long-lasting relationships with customers and build trust, making it easier to negotiate future deals and encourage repeat business, which is particularly important for international buyer-supplier relationships.

Invoice financing not only helps SMEs foster positive relationships with customers but also with suppliers. Maintaining a healthy relationship with suppliers is crucial for the smooth operation and success of a business, from ensuring a reliable supply chain to securing more competitive pricing and favourable terms.

And just as a business would prefer to receive repayment promptly, so too will its suppliers. With the funds obtained through invoice financing, businesses can meet repayment deadlines on time. This, in turn, helps strengthen vendor confidence and promotes a long-term partnership between supplying and buying businesses. 

Faster access to funding

Businesses typically must rely on customers settling their invoices in a timely manner to ensure steady cash flow. This can take up to 120 days for international suppliers that offer deferred payment options, which may have negative repercussions should businesses need working capital to fulfil their financial obligations.

Invoice financing services provide SMEs with a solution to this dilemma. By selling outstanding invoices to a third party, businesses can get immediate access to liquid capital without having to wait months for payment from the buyer.

Additionally, businesses can get faster access to funding through simpler and speedy application processes. As mentioned earlier, bank loan applications can be complicated and long-winded. Waiting to be approved for a business loan can take several weeks or longer, which could put SMEs in a difficult position if there are outstanding urgent bills.

Invoice financing applications typically have a quicker approval process compared to bank loan applications. The expedited process allows businesses to access funds almost instantly, stabilising cash flow and enabling businesses to overcome temporary cash shortages.

About the Authors

This article is authored by the Stenn research team and is part of our educational series.

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.

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Disclaimer: The above article has been prepared on the basis of Stenn's understanding of the subject. It is for information only and doesn't constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.