Emerging Finance Planning Issues For SMEs

23 Dec 2020 | 10.21 am

Emerging Finance Planning Issues For SMEs

The view from the Irish Asset & Invoice Finance Association

23 Dec 2020 | 10.21 am

David Avery, head of commercial finance at AIB, predicts that it will take longer to get paid in 2021

It’s been a year like no other but, even if hopes of a vaccine are realised, the impact of the Covid-19 pandemic on the Irish economy – and the small and medium-sized businesses that make up the vast bulk of it – will be felt for some time to come. With that in mind, there are a number of trends that businesses need to be aware of as they plan for 2021 – both to protect their cashflow and to capitalise on any opportunities that may present themselves.

Trend 1: There will be an increase in Mergers and Acquisitions

First, it’s become quite obvious in the past few months that the pandemic has clearly led to an increase in merger and acquisitions (M&A) activity, as well as management buy-outs (MBO’s). The recent trend towards consolidation – perhaps most clearly seen in Ireland in the services sector – led many Irish firms to be acquired by larger UK, European, or US businesses, who benefitted from the increase in scale and synergies this created. 

However, the disruption caused and cutbacks necessitated by the pandemic have meant that this business model has become unsustainable – and a number of Irish firms have instead chosen to emancipate themselves from their parent company.

For many of these Irish firms looking to buy their business back from the global players, doing so without taking on more debt has been crucial. As a result, many have turned to invoice finance as one way of quickly accessing cash and re-establishing themselves as independent players. This allows them to get direct and up-front access to 90% of the value of unpaid invoices.

Equally, where M&A activity is still occurring, invoice finance is increasingly key to financing these deals. In one recent example, for instance, 65% of a profitable services provider with an annual turnover of €4.3m was acquired by a rival. While term debt made up the bulk of the financing used, invoice finance was used to fund almost 25% of the total deal. The reason? Invoice finance is an evergreen facility that can be repaid as the new owners’ cashflow allows, and increased in line with sales growth.

Trend 2: It’s taking longer to get paid, so make sure to prepare for this

The second key trend that Covid has accelerated relates to the time taken for businesses to get paid. Our research shows that, on average, Irish firms are having to wait 64.1 days before being paid by their debtors. 

That’s an increase of just under ten days compared to the same period in 2019. The effects this has on cashflow are considerable, as it may force them to delay ordering new stock, or have difficulties paying wages. This extension of the cashflow cycle therefore affects not just individual businesses, but can be felt across the Irish economy, and particularly the SME sector.

Should this trend continue, businesses may reach breaking point rather than be able to bend any further. More than ever before, strong cashflow management is needed to cope with the consequences of Covid. Again, invoice finance has an important role to play, helping businesses better absorb any unexpected delays in payments and ensure they are still able to pay any overheads on time and as planned. 

It is this ability to provide businesses with a regular and timely cash injection that will see interest in invoice finance continue to rise long after the worst effects of the pandemic have passed.

Trend 3: Many SME’s don’t want to take on debt to facilitate cashflow, so do your homework on the options available

The third trend of note is the rapid uptake of invoice finance facilities by Irish businesses since the start of the year. While a number of supports have been made available to businesses affected by the Covid-19 pandemic, the majority of these are in the form of debt finance. But at a time when many are struggling to keep the doors open and staff on the books, taking on additional debt may not be the best solution. 

Instead, Irish firms have been increasingly casting the net more widely to consider options that, a number of years ago, they may have discounted. Last year, for instance, sales turnover generated by companies using invoice finance reached €28.6 billion.

The pandemic’s impact on the Irish economy cannot be overstated. But what these three trends show is the willingness of businesses to adapt and innovate in order to succeed. 

While unfortunately many businesses up and down the country may never return to complete ‘normality’, one positive we can take from the past year is an increased willingness to embrace new ways of managing cashflow. In the long run, this should bring greater financial stability to Ireland’s small and medium-sized firms in particular.

  • David Avery is also chair of the Irish Asset & Invoice Finance Association, whose members are AIB Commercial Finance, Bibby Financial Services, Capitalflow, Close Brothers, and Ulster Bank Invoice Finance
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