Member Article

Small business cash flow problems: beware Brumark

More than one in three respondents to our latest Business Barometer survey in June said it is as difficult or more difficult to access finance today than it was a year ago. How can this be? As the UK moves away from recession should the banks be loosening their purse strings?

The truth is that there’s a popular misconception about the credit crunch of 2007-08: while the crisis undoubtedly did result in many banks withdrawing from more risky lending activities – including funding even very strong small and medium-sized enterprises – the banks had already been scaling back their commitments to many of these businesses.

The rationale for that withdrawal dated from the legal dispute six years earlier, which we know as the Brumark Case. In short, it was a ruling that made it much tougher for many SMEs to obtain bank funding – and the situation still remains. To recap, in the Brumark case the court ruled that book debt (money owed in unpaid bills) was to be considered a “floating charge”. Lenders that hold fixed charges (as opposed to floating) have priority on a company’s assets if it becomes insolvent; removal of this priority was a major blow to the banks.

Overnight, the case increased the risk for the banks to lend to any company where they might previously have been reassured to see substantial amounts of book debt. The direct consequence was that many SMEs found it more difficult to secure the finance they needed – well before the credit crisis began to bite.

As our latest Business Barometer survey revealed, this isn’t changing now the financial crisis is over. But SMEs today are more in need of finance than ever. Not only do they need capital to finance investment plans as they try to exploit the opportunities created by a recovering economy, but they’re also struggling in the face of the late payments crisis.

Nearly a fifth of respondents to the Barometer said late payments were causing more of a problem now than a year ago. Two thirds complained this made cash flow more difficult to manage while for 15% of SMEs, late payments are seriously threatening their ability to trade.

Worryingly, many SMEs say they are simply having to write off the value of late payments:

• 49% said they had written off up to 10% of turnover
• 20% wrote off between 10% and 25% of sales

So, where do growing businesses turn to secure finance in this context? It’s an important question, since the Brumark ruling remains just as relevant today.

A key development is the invoice finance sector, which has been able to step in where the banks now fear to tread. That’s partly because the legal status of this type of funding is different to the traditional solutions offered by the high street banks. Invoice finance providers effectively acquire the debts of the company to which they’re advancing the value of an unpaid invoice. So in the event of that company going out of business – unlike the banks – they are able to collect the debt themselves.

For this reason, invoice finance providers are often able to support businesses where the banks are more reluctant to provide funding. The Brumark ruling may be almost 15 years old, but the impact of the case continues to be felt today and has created a new environment for business funding.

Key takeaways

• Invoice finance providers may be more comfortable with certain businesses where high street banks are reluctant to lend.
• A rejection from the bank may reflect its fit with the nature of your business, don’t be afraid to talk to alternative providers.
• Businesses seeking funding for growth could benefit from looking across the whole market, rather than only considering finance from high street lenders.

See how the landscape for business funding is changing: download the guide - Business Barometer: Emerging trends in funding for cash flow and expansion. Copy and paste this link into your browser: http://bit.ly/1UhdhgW

This post first appeared on the Close Brothers Invoice Finance blog.

This was posted in Bdaily's Members' News section by David Thomson .