For any economy to thrive, the small to mid-range sector (SME) has to be nurtured. There are two things businesses outside the big global corporate sector need to go forward and grow. It all comes down to access to capital and access to markets.

For local companies doing most of their trading locally access to markets generally means ready access to a first class road and rail network, and from there, if required, to ports and airports for air and sea freight. Access to working capital on the other hand is all about bank funding or – with the banks increasingly withdrawing from the SME market – to alternative sources of funding.

For smaller companies, right up to corporates looking to borrow £5 million or more, perhaps the most readily available source of funding around is invoice discounting or factoring. The latter is more targeted at the lower end of the SME market, as Joanna Cashmore, Head of Sales, Scotland for Bibby Financial Services explains.

Both forms of financing are essentially all about lending based on the client’s sales book, with the invoice financiers advancing anything from 75 per cent to 90 per cent of a sales invoice as soon as it is generated by the client company.

However, factoring, is ideal for the smaller company that cannot justify employing a full-time or even a part-time person to chase payment on outstanding invoices.

"With factoring, we do everything once the client has generated the invoice. We monitor payment and chase outstanding payments, including arranging the initial legal contacts for protracted payments, such as sending the client the "seven-day letter" (demanding payment or court proceedings will follow," Cashmore explains. The invoice goes out on the client’s own letter heading with factoring, but it shows clearly on the face of the invoice that the debt has been assigned to the invoice finance provider.

Bad debts, which means payment that has not been collected within 60 or at worst 90 days, perhaps because the client’s client is disputing the goods or some such, revert back to the client company and it will have to repay Bibby Financial Services any sums advanced on the strength of that invoice.

However, Cashmore says client companies can opt to take out insurance with Bibby Financial Services against any of their clients defaulting. The cost of insuring against non-payment, she says, is trivial by comparison with the sums being insured and it gives the owner protection against delinquent accounts.

By way of contrast with factoring, invoice discounting is fully confidential. The invoice is sent out by the client, who also does all the chasing for payment. Again, if one of their clients default, the moneys advanced against the invoice will have to be repaid (in the absence of bad debt insurance). Bibby Finacial Services currently provides upwards of £360 million to businesses across the UK and supports some 7,200 enterprises with its funding solutions.

The advantages that both factoring and invoice discounting bring to user organisations lie in two major areas. First, the company gets is paid cash as soon as the invoice is written out, and second, the amount of cash the company can raise through invoice discounting exactly parallels its sales. So if it is generating more, or larger, invoices, proportionately more cash is available. This makes invoice discounting very flexible as a funding instrument.

Second, because an organisation like Bibby Financial Services does a great deal of due diligence on a client’s client before agreeing to discount those invoices specifically, anyone using the company’s factoring or invoice discounting services can place more confidence in the standing of any new client they sign up, or conversely, they will have a potentially troubling client flagged up to them.

Cashmore points out that another major reason to use invoice discounting is when companies want to raise finance for an acquisition or a buyout. If the sales daybook is unencumbered by being pledged elsewhere, it can raise a significant amount of cash to add to the company’s acquisition or buy-out fund. "We work with companies wanting cash for corporate transactions, and also where funds are needed to restructure a company that has got into difficulties," she explains.

Cash is just one part of the solution. Another significant element is the immediate commercial and physical location and the ease of access to that location. This is particularly the case where an area is trying to recover from a legacy of major industrial closures. In such cases major investment from either government or local councils is required to create new roads to help uplift the area to make it attractive, once again, to business.

Answers to prayers for funding

Despite constant assurances from the business banking sector of its willingness to lend much needed capital to the small and medium company sector, the feedback from those companies themselves is not always so upbeat.

An increasing number of their chief executives are resorting to alternative forms of finance in order to fund start-ups or kick-start a new phase of growth or development.

Angel investors such as Scotland’s Archangels comprise syndicates of wealthy individuals who invest their own money in companies. Notably, they have drawn on support provided by public sector coinvestment funds to provide support for hundreds of Scottish companies in areas such as software development and life sciences, expecting to generate healthy returns when they exit as the companies are sold or floated on the stock market.

Crowdfunding, which refers to raising money on the internet has come to prominence through well-publicised campaigns such as Ellon-based craft beer maker Brewdog. It has launched its latest drive in the US, which aims to raise $50 million, though its recent Equity for Punks drive ended £6 million short of its target and it had to issue a mini-bond during the fourth round after investment slowed, suggesting the novelty value of these campaigns may be tailing off.