At the recent Finance Connect conference, colleagues from the receivables finance sector gathered to discuss the current state of RF and its direction for the future. Having participated as a facilitator for a couple of the sessions, our expert, Richard Carter, believes there are some key takeaways that warrant careful consideration, not just about where receivables finance stands today, but more importantly, about where it needs to go.
The Current State of Receivables Finance
Receivables finance in the UK is at best static in terms of growth in numbers of organisations using some form of invoice finance. The big banks, although invested in the product, appear to be less engaged in the SME segment of the market.
So, is there an issue here and what can be done about it?
To be clear, receivables finance is a great product. It provides a flexible way of financing a company’s working capital cycle and is not tied to the strength of the balance sheet that other funding products tend to be.
Why the Challenges?
So why does there appear to be some challenges for receivables finance in today’s market? There are a number of factors that have contributed to this:
- When COVID hit, the government chose to keep liquidity strong in the market by providing term loans that were meant to tide businesses over that difficult period. However, it appears that these simpler forms of finance have become far more prevalent in the market, given their ease of packaging and delivering in a quick, seamless and low-touch way.
- Receivables finance products have had a limited amount of development, with perhaps onboarding and some other actions being subject to investment from modern technologies, but today, that has been limited.
- Receivables finance can be quite intrusive for a customer and necessitate changes to the way they operate. Plus, it can be challenging for a customer to know exactly what funding they can get from the receivables finance facility, and fees and costs are not always clear.
- There has been a lack of investment in the product to allow developments in the likes of open banking, risk tools around both underwriting and fraud management, as well as using other applications for data extraction. There are solutions out there that can mean potential customers can have an approved facility and documentation sent to them for electronic signature within hours rather than days, weeks or months, and then have a facility operating very shortly thereafter.
What’s Possible with Modern Technology
- New clients can be onboarded within minutes with a definitive offer being made that gives a clear view of pricing and a precise level of funding. That includes initial KYC, Director, AML and other screening.
- Documentation can be sent out at the same time which can be signed electronically, so the legal position can be accelerated to have the facility up and running quickly and funding deployed quickly.
- Open banking, connectivity with the customer’s accounting package and credit bureaus means visibility to the actual trading going on in the business: trends, debtor payment history and detailed risk insights. These can also be played back to the customer to help them navigate their buyers’ risk profile and give the client support on the health or otherwise of their working capital situation.
- Those data insights can support credit management as well as automate and even eliminate the need for reconciliation work, given the direct line of sight to the customer’s accounting package and not a shadow ledger in a funder’s financing system.
- Technology can be deployed or rather embedded into software and accounting packages that allow for the customer to choose what, how often and when funding is needed, and the funder can give a transparent offer on that cost.
Addressing the Concerns
There will be those who may raise concerns that this will mean greater risk in the product, a loosening of controls that have hitherto meant that this form of funding for a financier has been pretty secure. For those who have ventured down this path, though, the evidence does not suggest this at all. In fact, having real-time data at your fingertips gives the advantage of seeing issues early and dealing with them so that the product becomes more robust.
The Choice Ahead
The challenge is: are you prepared to adapt and move receivables finance into the future, or rely upon current processes and procedures that absolutely do work, but don’t address some of the challenges RF is facing today?
The technology exists. The business case is proven. The question is whether the industry will embrace the change needed to keep receivables finance competitive in an increasingly digital financial services landscape. Those who move now will be best positioned to capture the next generation of SME clients who expect the same seamless, transparent experience they receive from other modern financial products.
At Finativ, we help financial services businesses navigate transformation and modernisation in receivables finance and beyond. If you’d like to discuss how to position your receivables finance offering for the future, please get in touch.
