Procurement has always been a vital component of any SME’s business strategy. However, as a result of the financial crisis of 2008-2009, businesses have increasingly looked to their procurement departments to improve margins and help deliver growth.
In addition to overseeing value analyses, price negotiations, supply contract administration and more, procurement professionals are tasked with securing funding for their company’s purchasing projects.
Traditionally, SMEs have looked to banks to secure lending. Yet, the very nature of SMEs has invariably meant that their finances can be highly complex. Combined with the relatively small loans requested (in the eyes of the banks that is), the lack of resources within the majority of SMEs, and the highly specialized level of expertise required from the banks to facilitate such loans, the traditional “big” financial institutions have become slow or even reluctant to lend to smaller enterprises.
Moreover, SMEs often lack the appropriate paperwork such as audited accounts which allow a traditional bank to assess its suitability for a loan. To top it off, SMEs’ high-risk reputation is another factor which has only become worse since the financial crisis.
Consequently, banks’ lending to SMEs have not only decreased in recent years, but the cost of borrowing has increased due to their lower appetite for risk.
The government and other local authorities have tried to step in to bridge the gap with funded initiatives including guarantees, direct lending and credit bureaus to support SMEs. However, a huge funding gap still remains.
How Procurement has changed
Although the majority of SMEs still approach banks to raise funds for procurement projects, the emergence of FinTech companies in recent years has provided an alternative.
While FinTech companies were initially aimed at the consumer market, newer firms have turned their focus to the business-to-business market, offering new funding options to the SME sector.
Rather than being restricted to a bank, SMEs now have the option to partner with a growing number of FinTech companies to secure funding from a wider range of solutions.
Below we have detailed some options for procurement managers who are in need of funding.
A popular option offered by the new breed of FinTech companies is ‘asset finance’. This is where a business can use an asset to get funding. Asset finance is invariably easier to obtain than a bank loan. A couple of advantages are that the procurement manager is able to spread the cost, in some cases for up to 6 years, and that the business can start using the equipment before it is fully paid. Moreover, if the business defaults, only the equipment will be retained and nothing else will be lost. Almost any asset can be financed with specific strands of this funding option being refinancing, leasing and hire purchase.
Procurement departments can also now use FinTech companies for invoice financing.
Invoice financing usually releases in the range of 95% (dependant on the lender – and on the buyer’s situation) of a business’s invoice value. It is effectively a short term loan and is again easier to secure than a standard bank loan.
There are two types of invoice financing: factoring – where the financier deals with credit control – and potentially negotiates with customers, and invoice discounting, where the credit control is handled by the business applying for finance.
Trade finance, also known as purchase order finance is the process whereby lenders fund a supplier in advance, based on their confirmed orders. Trade finance is an increasingly popular financing option among SMEs. It allows them to raise funding in a relatively short space of time, which lets them make planned purchases and trade confidently.
The benefits of third party suppliers
FinTech companies can now offer a genuine alternative to established banks for SMEs.
Where banks may have previously seen SMEs as ‘high-risk’, the new breed of FinTech companies are open to providing a range of genuine funding solutions with functions and tools that are tailor-made for this sector. Many of the platforms offered offer API integration in to existing systems, which means little-to-no disruption to established business processes.
Built on the very latest technology, these third party companies offer a vast array of features and funding options which have not been readily available to the majority of businesses until recently.
In the case of Currencycloud and the technology and features on offer, such as real time currency conversion on a trade by trade basis, bulk uploads and tracking of reports in real-time can truly streamline the internal processes for SME procurement managers. Consequently, reducing overheads considerably and enabling them to trade more confidently and efficiently, driving expansion and growth in the wider economy.
The UK’s existing financial infrastructure and expertise is fertile ground for this innovative and exciting new sector to flourish. It will pave the way for further change within business’ and procurement in the UK.