Rob Harris | 14 September 2017
Given the majority of UK SMEs are run by owner managers, it seems reasonable to expect an echo of the nation’s approach to personal finance in its business funding decisions. In the decade or so since the financial crisis, however, that assumption appears increasingly vulnerable.
Whilst demand for consumer finance has remained robust – to the point of regulatory unease – there has been little or no read across to business credit. The statistical contrasts are marked; since 2012 consumer lending has grown at an average annual rate of 10% – a period that has seen the percentage of SMEs seeking finance almost halve.
Against this backdrop it is perhaps inevitable that the invoice finance market has had to take a share of the pain. Having grown materially through the previous two decades, it now supports broadly the same number of businesses as it did in 2005.
Up to a point this can be attributed to an inevitable response to the crisis and aftermath, but for numbers to stall from a relatively low base suggests other challenges.
Uniformity…
I have a hand to declare having spent 15 years helping to run a UK invoice financier.
Throughout that period, profitable growth and finding ways to break out beyond the natural ‘factorable’ sectors was often top of mind. It always felt like a product-homogenous world, with factoring or invoice discounting from one supplier looking and operating broadly like that from any other.
The natural extension in the absence of any material product segmentation tended to be deals that cleared at the lowest combination of price and risk. In theory this is great for customers, but if prices are falling and lenders’ risk appetites are widening, why aren’t borrower numbers responding?
Something else must be getting in the way. I wonder, perhaps, if it’s increasingly a question of design.
…vs diversity
The sector starts from a simple premise; the working capital cycle can be neatly managed by giving the customer the discretionary ability to draw against their sales ledger to match up their purchase ledger commitments. From this grain of common sense has grown a complex product mix.
Extended sales and underwriting processes, asset valuations, legal agreements, charges, guarantees, assignment processes, cash handling procedures, debt verifications, reconciliations, bolt-on products, interest and non-interest fees – all underpinned by an impenetrable new-to-master vocabulary.
Yet it feels as though there has to be some exploitable middle ground between the simple matching of cash flow needs and incumbent operating models. Whilst this isn’t to imply inroads haven’t been made – material movement away from whole turnover agreements, improved integration with customer accounting packages, automated reconciliations and online service portals have all played a part – the critical mass of the invoice finance product still feels designed ‘for and by the lender’ rather than the borrower.
Alignment
Globally, the balance of power between customer and supplier has switched irreversibly over the 20 years since Jeff Bezos registered the amazon.com domain.
Consumers realise that they have the collective ability to dictate the fortunes of even the most robust global brands, their principal tool being an ability to publicly articulate en masse what it feels like to be a customer of a particular organisation.
With an average age of 45, the UK’s company directors have lived through and grown very used to these changes, and it is here that the symmetry with their personal product lives is most pertinent to the UK’s business funding market. They expect to see their priorities and needs reflected back to them in the design of the products and services they buy.
Driving change
The invoice finance market isn’t going to be immune to these changes and will have to think about ways of morphing its immense collective understanding of financing receivables into products that both extend its market and make it more attractive to interact with.
It is ultimately a search to find a better balance between target market, management of credit risk and a more contemporary imagining of product delivery, whilst not being naïve to the very real commercial risks of lending against receivables. Clearly, it’s a tough balance to strike.
There is plenty of investment capital – some of which has already been committed and increasingly spent – interested in supporting teams that see an opportunity to use receivables as a less explicit collateral to underpin products funding SMEs.
Increasingly direct access to underlying customer data is part of the answer, as in time will be some of the changes being ushered in by the Open Banking initiative and, further down the line perhaps, the distributed ledger technology of Blockchain.
For now, though, an operating model design process that begins with the needs of an SME owner manager who is increasingly used to dictating the terms is a must.