For SMEs, navigating the financial world can be overwhelming. However, it’s essential to the growth of the business. Simon Featherstone, Non-Executive Chair at Clear Factor tells Intelligent SME.tech about why there’s a gap in the market for special financial services for SMEs and how Clear Factor is helping to address this.
What is the mission or founding principles of Clear Factor?
The founding mission and vision of Clear Factor is to democratise access of finance to the smallest end of the SME sector through the provision of a digital invoice finance solution that brings capital markets pricing to micro-SMEs to allow them to access cash in seconds through their devices.
Why is there a gap in the market for specialist financial services for SMEs?
In older banks, which have older systems, there’s been lots of developments in new finance propositions. But they’ve not been able to take out the processing, operational and the risk costs of lending to the smaller end of the SME marketplace. So they’ve helped with access at the larger end of the SME scale, but certainly not at the micro and small end.
What we’ve built is the world’s first end-to-end digital single invoice finance solution. So, a microbusiness could be raised an invoice for £500 for that month; then put it onto our platform and get access to 85% of that cash immediately, for a small fee. When the invoice is paid by the debtor, the SME gets the remaining balance less our fee and finance cost. It makes cash flow planning for small businesses so much easier.
But crucially, they’re not tied into long contracts that the traditional invoice finance industry does.
What are some of the key challenges SMEs are navigating when it comes to managing finances?
The benefits of larger banks, but also the downsides of larger banks. One of them is that more small businesses are pushed into call centres’ long wait times, dealing with a lack of expertise on the phone to be able to understand cash flow issues or suggest specialist solutions to help – and the challenge with that is the cost of delivering them.
The digital end-to-end solution takes those costs out, which means the cost of accessing democratising access to finance that smaller end makes it entirely possible. It’s easy, quick and very affordable for micro business to be able to access finance in a way they’ve never been able to before.
How is the financial marketplace changing and developing?
The whole of the finance marketplace, from consumer to SME, is changing dramatically, with new propositions like this all over the world. There are huge changes as we all get used to effectively having everything under our thumbprint on our phones.
Clear Factor claims to help SMEs gain access to affordable working capital solutions; how do you ensure you deliver on this?
So, there are financial institutions, pension/investment funds for example, that want to help SME’s with funding, but have no way of accessing the market. What they need is somebody, like Clear Factor, who can assess the risk of the individual, small business, distribute that capital to them and provide a return for the pension fund. And, most importantly, cash for the SME. So, it’s a win for the investment funds where they can get much better yields than lending to bigger companies, and it’s a win for the SME as well.
How can Clear Factor’s invoice ecosystem help SMEs globally?
The same problem exists all over the world. I’ve lent money in South America, North America, Asia and Europe with the same structural challenges and a lack of investment in digital capability to serve the smallest businesses. You need different solutions for different countries, but the same principal problems exist everywhere.
Invoice finance as a lending tool exists all over the world, so it’s not as though it’s a new proposition. It’s been around for thousands of years, but grew in the latter half of the 20th century to be a large market. Most of the players were larger banks doing larger lending in that space, rather than building out the proposition for micro and small businesses.
How does this type of FinTech help business strategy and growth for SMEs?
Most businesses, certainly in the UK and North America, fail because of a lack of working capital.
So, they question: ‘how do I fund that growth, how do I get access to the cash sooner?’. For example, you’ve just sold 40 cakes to a local restaurant and need to buy some more ingredients for the next big order. How are you going to get access to that? Because that restaurant will pay you in 45 days, how are you going to get access to that unless that proposition exists? And at a reasonable cost?
It brings forward the cash flow. You’ve raised your invoice, you’ve done the work, now I need some of that money, well, here’s a way of getting 85% of it immediately in the balance for a very low cost. It works for you to improve your cash flow and allows you to reinvest that. For example, paying your suppliers if you need to; buy some more machinery, some more raw materials; or pay bills or staff, depending on the nature of the business.
Where do you see the financial market in five years?
The big banks were a mile wide, they will still be there providing wholesale services and the big-ticket stuff. But there will be 1,000-mile-deep propositions serving specific specialisms that help different propositions. That could be something like Clear Factor, deep in invoice finance, serving a particular niche, through embedded finance propositions. People like us, in all sectors, are trying to digitise things that allow you to become really specialist and serve a particular market really well at a low cost.
So, my prediction, is five years from now there’ll be thousands of mile deep specialists and very few that are very big and broad. Because it’s difficult to be big and broad and innovative.
What are Clear Factor’s goals for the future?
We are now embedding with several distribution partners in the UK, where they are looking at overseas markets. Germany, Singapore and Brazil are really good markets for what we do.
We have to raise money ourselves as we are technically a small business and hope to become a relatively large small business – everyone’s expecting to grow.
The next markets for me would be Germany, Brazil and Singapore, where they offer a huge opportunity for what we do in established, well-regulated markets. There are different rules in each country so you’ve got to adapt and be agile in the way you move overseas as well.
Do you have any last advice for SMEs when it comes to finance strategy?
My advice would be to focus on the cash flow. Nobody ever went out of business if they focused on their cash flow and made sure they got money in the bank. Make sure you’re dealing with good, reputable people, who will pay you.
After that, try and have fun – business is good fun. If you’ve got something you enjoy and you’re passionate about, stay focused on that.