What is Alternative Financing and How it can Save Small Businesses

Satago partner Nimbla share their ideas on how alternative finance solutions—and the tech that supports them—can help small businesses during these challenging times.

New research has found that half of UK SMEs are being paid later than usual, and a third  are struggling with bad debt due to customers failing to pay. As Government schemes such as CBILS and furlough end, businesses will inevitably be strapped for cash. SMEs’ awareness of alternative funding sources is going to be crucial for sustaining positive cash flow in the coming months.

Why small businesses have a big funding gap

Funding isn’t a new problem for small businesses. The crisis worsened a longstanding funding deficit among SMEs, which the Bank of England estimates at around £22 billion in the UK, and just under a trillion pounds globally. This gap has been widening due to an increase in self employed workers and their inability to access funding from traditional sources.

According to surveys by BEIS and UK Finance, most SMEs invest personal funds in their businesses, and less than half use external finance. This means that the vast majority of businesses grow much more slowly than they could. In normal circumstances this may be sustainable, but to recoup the loss caused by the pandemic, UK businesses need to grow.

If you are a small business manager reading this, then you have overcome a major barrier to growth.  Many SMEs are simply unaware of the cashflow support that is available because alternative financing is less conspicuous outside of London and the South East. Most small businesses only approach one company for funding, and 85% of the time it’s their bank. If the bank rejects their funding request, SMEs typically don’t engage another funder.

What is alternative financing?

The good news for small businesses that are struggling due to the crisis is that there are more funding options available than ever before. Digitisation has created the necessary transparency around credit risk to make external finance affordable for SMEs. Funders no longer have to compensate for uncertainty with elevated premium prices. There are also a plethora of alternative financing options available, including peer-to-peer lending and invoice financing, and some funders (like Satago) cater explicitly to the needs of SMEs.

Unlocking finance with invoice insurance

After the financial crisis in 2008, it took seven years for lending to SMEs to return to pre-crisis levels. A high risk of customers defaulting on payments naturally made the business community (including funders) uncomfortable with offering credit. The resulting constraint on credit or ‘credit crunch’ hampered economic recovery at exactly the time when growth was needed most.

The difference this time around is that SMEs have access to the aforementioned alternative financing solutions, and a variety of other pioneering  financial services. An example of this is Satago’s partnership with Nimbla invoice insurance, which helps small businesses to protect themselves against defaults and access the funding they need during this uncertain period.

In a market in which a third of businesses are failing to pay on time or at all, Nimbla allows small businesses to insure individual invoices, or their whole ledger against customer defaults affordably. Businesses can then fund those invoices with Satago and  ensure that cashflow remains strong enough to enable pivoting and growth.

Trading securely in a crisis

Trade credit makes up almost half of the assets of the average UK business. This is because companies offer their business customers credit of 30, 60 or 90 days to facilitate trade. Yet this creates a potentially devastating  risk to cashflow that small businesses rarely insure. It has never been more crucial to do the due diligence on customer credit risk and be proactive about protecting your business’ cash flow. In normal conditions, late payments cost UK businesses £20 billion each year, but research suggests that this year the stakes are much higher. Especially in closely networked SME ecosystems, insolvency contagion is a real risk.

To sure up supply chains and prevent another credit crunch from stalling the economy, the Government introduced a temporary trade credit reinsurance scheme in June. Between the 1st April and 30th December 2020, the Government is shouldering the risk and uncertainty caused by the crisis so that business can resume unimpeded by a lack of credit. This means that companies can affordably insure against non-payment, access much needed finance, and trade with confidence. All of this will also help to keep cash flowing through supply chains.

Fintech and the future

Right now, SMEs have a huge opportunity to capitalise on new financial services to help them through this downturn. Real-time payment and transaction data has enhanced credit scoring and made financial services that had previously only been available to corporate businesses accessible to SMEs. Fintech is changing the game by offering new products and lending models that are flexible, affordable and better equip SMEs to grow.

In uncertain trading conditions, credit score insights like those offered by Satago can be critical to a business’ success or failure. The businesses that will survive and even thrive in this crisis will be those that harness fintech in service to the ingenuity that has always been a core strength of small businesses. We will see more insolvencies in the next few months, but SMEs are more agile than corporates, and can still use this advantage to pivot effectively.

Because future credit scoring will be richer still, reflecting real-time shipment data, satellite imaging and macro trends, the increased demand for new forms of SME lending could pave the way for further price reductions. And giving innovative SMEs access to finance and company credit insights could help to position the UK as an international innovation hub. Over the next few months, uptake of new financial products is likely to be business-critical for small businesses, and the economy.

Nimbla is the next generation of trade credit insurance, designed expressly for SMEs. Their flagship product –invoice insurance– offers unprecedented flexibility, and unlocks invoice finance. Nimbla has partnered with Satago to give businesses the confidence to grow in a challenging economic environment. To learn more about Nimbla, please visit Nimbla.com.