Free up the cash in your invoices – one company’s story

Free up the cash in your invoices
Free up the cash in your invoices

Sustaining cash flow is often a challenge for small businesses. How can growth be sustained when customer invoices are frequently paid late? One engineering group looked to a flexible funding solution for the answer.

Most of us will not be surprised to hear that companies with a turnover of less than £1 million wait on average 72 days for payment after issuing their invoice. According to research from the Asset Based Finance Association, this is one day more than in 2014, suggesting that the problem is getting worse.

This was an issue affecting a group of engineering companies based in the south and southwest of England. Established for more than 30 years, the group specialises in subcontract engineering. One company in the group produces parts for the pharmaceutical, automotive, nuclear and aerospace sectors, including one-off and prototype parts. The business also makes specific parts according to bespoke designs, either supplied by the customer or created in-house. Another group company manufactures small precision machine components, as well as complete products, and supplies a range of sectors including rail, telecoms and marine. Its services include precision CNC (Computer Numerical Control) machining, grinding, fabrication, precision sheet metal work and mechanical assembly.

The business was keen to kick-start a period of growth but waiting for settlement of bills by customers was hampering efforts. “We knew the potential and demand were there, but in order to be in a position to fulfil a higher volume of jobs you first need the people and equipment in place and that costs money. It’s the classic chicken and egg scenario; you need the contracts and income to finance more equipment and labour, but you need more equipment and labour to fulfil the contracts. It’s a vicious cycle that’s compounded by late payments,” said one of the senior company directors.

Like many small and medium-sized companies (SMEs), the group has found that traditional bank lending didn’t meet their requirements. “The facilities banks offer aren’t specific to your business,” says the director. “You generally have a choice of a loan or an overdraft and if neither of these fit the bill then it’s tough. They don’t take the opportunity to understand your business, its plans and needs. We wanted a service that would fit our specific needs and grow with the business”

The business looked to invoice finance to aid cash-flow and unlock working capital. Invoice finance is the generic term to describe a range of financial products designed to bridge the gap between the delivery of goods or services and the payments from the customer (or debtor). The invoice finance provider advances funds against the outstanding sales ledger until the individual debts are paid.

The group has now signed up to an invoice finance facility provided by Siemens Financial Services Limited. This means that when the company sends an invoice to a customer, up to 85% of the amount due is immediately advanced by Siemens Invoice Finance, with the remaining 15% paid once their customer settles the balance

Invoice finance is rapidly growing in popularity and now provides more funding than ever before to small and medium-sized businesses and is a very easy and popular method of meeting the cash flow needs of a business. According to one expert commentator, between 2011 and Q2 2015, the percentage of SMEs using ‘core’ forms of finance (loans, overdrafts and/or credit cards) declined from 39% to 28%. Conversely, the use of other forms of finance (leasing, invoice finance, etc) has grown, with 17% of SMEs using one or more of these ‘other’ forms of finance in the last year.

“We wanted to explore the idea of invoice finance and were introduced to Siemens via a third party. We were looking at a couple of potential providers but after several meetings with them we started to build up a relationship, and it was this that really persuaded us to go forward,” explains the director.

“We actually already had a long established relationship with Siemens, as we have been supplying parts to them for 15 years. This certainly gave us peace of mind as we knew we were working with a trusted and familiar name.

“It’s satisfying to work with a partner that understands our business. Banks only care that you’ll repay the money on time; they don’t take the time or effort to learn exactly how your company works. The Invoice Finance team at Siemens understood our requirements and provided a revolving working capital facility that grows in line with the turnover of the group. The facility allows us access to cash through a live system, while retaining the credit control function and maintaining key customer relationships. The service has been tailored to us and through extensive discussion about our requirements they have built a bespoke solution that fits our needs.”

The group will use the facility to meet their growth aspirations by financing a growing order book and managing peak trading periods. By using the money released by their invoice finance facility with Siemens, the materials, equipment and labour can be purchased to complete jobs more quickly than before. The revenue from these orders can in turn promote growth.

The group’s director has clear advice for SMEs facing a similar cash flow challenge. “My suggestion would be to consider alternative options when it comes to financing. Sadly, SMEs bear the brunt of late payments and that’s not likely to change dramatically in the near future. However, poor cash flow shouldn’t be accepted as an obstacle to business growth and development.”

“I think when many businesses consider financing options they automatically look to a traditional bank. This is changing, but more SMEs need to join the trend.

“Part of this mindset is because they know and trust the names of the banks, but taking on bank loans can land you with high interest payments and restrictive conditions. SMEs need to realise that there are other options out there that can be much better suited to your business needs. Not only that, but there are long established, experienced, global service providers that can be trusted.

“We feel we’ve got the best of both worlds: a reliable supplier and a tailored service. By partnering with a provider that takes the time to learn about your business, your goals and how you work, you’ll find that you end up making progress towards those goals much faster and probably more easily too.

“Thanks to our arrangement with Siemens for invoice finance we are now looking forward to a period of expansion, during which we can be confident of having the funds to sustainably propel the business forward.”

Diversifying your sources of finance – the role of invoice finance

In the past, small and medium-sized enterprises tended to rely on bank loans for their working capital needs, but that has now changed. Figures from the Bank of England show that net lending to businesses has been negative since 2012, particularly among SMEs.

Broadly, in order to put together their optimum financing mix and not be overly reliant on one provider, businesses are looking to diversify their sources of working capital funding, embracing a range of alternative financial tools, such as crowd-funding, asset finance, inventory finance, and – the subject of this short piece – invoice finance.

With invoice finance, the funder advances a percentage of the invoice to their client normally the following working day, yet allows the debtor to pay the invoice to their standard terms, thus bridging the financing gap. This is a vital cash flow tool for any SME, especially given that poor cash flow is often cited as the most common cause of company failure.

For firms that are part of the technology or manufacturing supply chain, it is often advantageous to source their invoice finance service from a provider that understands how their industry works. Why? Because these expert financiers – such as Siemens Financial Services – are able to provide a faster, easier invoice submission and acceptance process that incorporates a more acutely knowledgeable assessment of debtors. As an example, Siemens Invoice Finance will seek to advance payment on invoices uploaded almost instantaneously – that kind of same-day service is rare in the market.

Other than industry expertise, there are several other key qualities to look for in an invoice finance provider. First, they should be able to demonstrate commitment and long-termism to any market they enter. Siemens Invoice Finance has entered the UK market to complement its existing financial services business and aims to expand into Europe and the US in the near future. Secondly, the credit rating of the financier itself will determine their cost of funds, and therefore how competitive their rates are. For example, Siemens has a Standard and Poors rating that is in excess of some banks.

Why let useful working capital lie locked in your sales ledger, when this cash could be helping to ramp up sales and promote growth? Invoice finance is a key part of today’s SME finance portfolio.

Boosting your exports – implementing invoice finance abroad

Small and medium-sized enterprises who export to foreign markets are growing faster than those concentrating mainly on their domestic markets. Moreover, a significant minority of pioneering SMEs are now managing to achieve online sales to countries right across the globe.

Interestingly, the last ten years has seen technological developments that have made it easier for SMEs to play on the international stage. Western governments are going out of their way to encourage SMEs to grow their export markets in the light of low EU domestic market development. It is now relatively easy for SMEs to establish a web presence that they can disseminate worldwide. Flexible workspace providers now make it easier to establish (and afford) an experimental presence in new export market countries. In other words, practical barriers to entry for SME exporters have diminished and the rewards for SME exporters can be seen to be high.

Yet, even though SME exporters are turning in a better performance than their domestically-focused counterparts, the fact remains that too few smaller firms are tapping into export markets and there continues to be huge potential for growth in sales abroad. Key perceived barriers to entry for European SMEs into those export markets include access to working capital, or cash-flow funding.

For a new export presence though, cash flow is critical. Ironically, while new market opportunities may be strong abroad, knowledge about overseas companies, their culture, demographics, behaviour and payment performance, is not the hallmark of most SME exporters. That is why many choose to ease their cash flow by working with an expert invoice finance provider such as Siemens Invoice Finance, in order to tap into an expert, long-established financier’s worldwide network and knowledge of foreign markets. The result is a smoother cash flow and the elimination of payment risk – a recipe for export success.

For further information on the services that Siemens can offer your business, contact Ian Cole, Head of Invoice Finance, UK Sales, Siemens Financial Services, telephone: 01753 434111; email: