The small business financing market is in a unique position: despite market volatility and an economic downturn, funding availability remains strong for SMBs thanks to government funding initiatives.
In the U.K., one of the largest aid programs is the Bounce Back Loan Scheme (BBLS), which has facilitated more than $53 billion in financing to SMBs, according to the most recent statistics from HM Treasury.
“U.K. businesses, for the first time in my lifetime, are spoiled for choice in terms of the funding that is being made available to them,” reflected Toni Dare, founder and managing director at invoice financing technology firm Pulse Cashflow Finance Ltd.
Speaking with PYMNTS, Dare explored how this surge in funding availability has affected the alternative finance market, and what’s ahead for FinTechs as government funding schemes eventually run dry.
Funding Ebbs And Flows
In the wake of the 2008 global financial crisis, new FinTechs surfaced to facilitate various forms of financing to small businesses as traditional banks pulled back from the market. While the world is one again in a precarious economic situation, this time around, bank lending has remained strong as a result of government programs.
For an invoice financier like Pulse Cashflow, the impact from those programs has been clear. Dare pointed to U.K. Finance statistics that found a decline in the number of businesses seeking invoice finance “for the first time in many, many years,” she said. Indeed, U.K. Finance analysis published in July found that a combination of government-backed loan schemes and the decline in B2B trade volumes each contributed to a drop in invoice finance demand.
But this trend is simply part of the ebbs and flows of the market, according to Dare.
“The BBLS funds are being used by directors, owners and managers to support their businesses to ensure they survive the crisis. Making sure their business is still there when we come out the other side is utmost in their minds,” she said. “However, these funds are and will continue to be depleted over time, and we will start to see a resurgence of demand for cash flow funding to help firms take advantage of the opportunities as they arise.”
Signs of government funding running dry are already emerging: earlier this week, reports revealed U.K. challenger bank Tide is running out of small business funding after withdrawing from the BBLS.
An Industry-Specific Approach
In anticipation of a return of demand for alternative financing solutions like invoice financing, companies like Pulse Cashflow have an opportunity to propel the recovery and resilience of small and medium-sized businesses.
Dare noted that one means of doing so effectively is by taking an industry-specific approach to funding.
“Numerous sectors have a higher propensity to use invoice finance,” she explained. “Sectors where credit terms are lengthy or there are inherent late payment issues” are particularly well-positioned to benefit from invoice financing.
Entities in the distribution and logistics space operate with low margins thanks to high upfront costs like drivers, fuel and vehicle maintenance. Yet these businesses only invoice at the end of the month, adding further delay to their capital in-flows. Dare offered another example of the construction industry, in which cash flow can be a headache thanks to a reliance on contractual agreements and stage payments.
Invoice finance is only one of a growing list of alternative funding types that will play an important role in keeping small and medium-sized businesses in operation even after economic recovery is underway. While government-funded SMB financing schemes provide much-needed relief, they are only temporary solutions.
The SMB financing arena won’t look the same way it did in a post-pandemic market, however. While an ecosystem that consists of both traditional and alternative financing methods will persevere, Dare predicted some changes in the makeup of the market as well as the on-boarding process that will shift as a result of heightened digitization.
“By the end of this crisis, you may see a reduction in the number of funders in the market as some consolidation will inevitably occur,” she said. “I cannot see any change to both traditional or alternative forms of finance to support businesses into the future. What will change is the process of signing up new transactions. We have become used to an increased use of technology, which will not go backwards.”