Lloyds shuts invoice financing service as small businesses feel squeeze – Financial Times

Lloyds Banking Group Discontinues Invoice Financing Service for Small Businesses

Overview

Lloyds Banking Group, the UK’s largest high street bank, has announced the closure of its invoice factoring service for small business customers by the end of the year. This decision reflects a broader trend among major UK lenders to shift focus towards more profitable corporate clients, impacting small and medium-sized enterprises (SMEs) that rely on such financial products.

Context and Implications

• Invoice factoring involves banks purchasing unpaid invoices from small businesses at a discount, providing immediate cash flow while assuming responsibility for payment collection.
• The service is crucial for SMEs to manage cash flow and operational costs, especially amid rising expenses such as increased minimum wage, business rates, and energy costs.
• Other major banks have taken similar steps: NatWest and Barclays have closed their factoring businesses, while HSBC has tightened eligibility criteria to customers with over £1 million in annual turnover.

Challenges in Invoice Factoring and SME Financing

1. Profitability Issues: Factoring services primarily serve SMEs, which often generate limited profits for banks, making the business less attractive.
2. Limited Cross-Selling: Banks have struggled to cross-sell other financial products to factoring customers, reducing potential revenue streams.
3. Stringent Lending Criteria: Increasingly strict revenue and profit requirements exclude many smaller businesses from accessing factoring services.

Impact on Small Businesses and Sustainable Development Goals (SDGs)

The closure of invoice factoring services poses significant challenges for small businesses, which are vital to economic growth and employment. This development has implications for several Sustainable Development Goals:

• SDG 8: Decent Work and Economic Growth – SMEs contribute substantially to job creation and economic development. Reduced access to financing may hinder their growth and sustainability.
• SDG 9: Industry, Innovation, and Infrastructure – Access to financial services like invoice factoring supports innovation and infrastructure development within SMEs.
• SDG 10: Reduced Inequalities – Smaller businesses often face financial exclusion; limiting invoice financing services may exacerbate inequalities in access to capital.

Stakeholder Perspectives

• Federation of Small Businesses: Craig Beaumont emphasized the need for banks to adopt more generous lending positions to support SMEs facing rising operational costs.
• Business Owners: Nathaniel Southworth, managing director of KAP Toys, highlighted the challenges smaller firms face due to banks’ preference for predictable financial profiles, often excluding less uniform businesses.
• Banks’ Position: Lloyds stated that its invoice factoring division is modest and that alternative services will continue to support customers. HSBC reaffirmed its commitment to providing cost-effective lending products for small businesses.

Conclusion

The withdrawal of invoice factoring services by Lloyds Banking Group and other major UK banks underscores a critical shift in SME financing. While banks prioritize profitability and larger corporate clients, the resulting gap in accessible financial products for small businesses may impede progress towards key Sustainable Development Goals related to economic growth, innovation, and reduced inequalities. Stakeholders call for enhanced support mechanisms to ensure SMEs can sustain operations and contribute to the UK’s broader economic prosperity.

1. Sustainable Development Goals (SDGs) Addressed or Connected to the Issues Highlighted in the Article

1. SDG 8: Decent Work and Economic Growth
   • The article discusses challenges faced by small and medium-sized enterprises (SMEs) in accessing invoice financing, which impacts their cash flow and ability to sustain and grow their businesses.
   • It highlights issues related to employment costs, business rates, and the economic environment affecting SMEs.
2. SDG 9: Industry, Innovation, and Infrastructure
   • The focus on financial services and banking infrastructure that supports SMEs is relevant to building resilient infrastructure and fostering innovation.
3. SDG 10: Reduced Inequalities
   • The article addresses the disparity between large corporate clients and small businesses in accessing financial services.
   • It highlights how smaller businesses are being excluded due to stricter lending criteria, which contributes to economic inequality.

2. Specific Targets Under Those SDGs Identified Based on the Article’s Content

1. SDG 8 Targets
   • Target 8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity, and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises.
   • Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance, and financial services for all.
2. SDG 9 Targets
   • Target 9.3: Increase the access of small-scale industrial and other enterprises, in particular in developing countries, to financial services, including affordable credit, and their integration into value chains and markets.
3. SDG 10 Targets
   • Target 10.2: Empower and promote the social, economic, and political inclusion of all, irrespective of age, sex, disability, race, ethnicity, origin, religion, or economic or other status.

3. Indicators Mentioned or Implied in the Article to Measure Progress Towards the Identified Targets

1. Indicator for Target 8.3 and 8.10
   • Proportion of small-scale enterprises with access to financial services, including invoice financing and factoring services.
   • Number or percentage of SMEs using invoice factoring or other working capital financing products.
   • Availability and affordability of credit products tailored to SMEs.
2. Indicator for Target 9.3
   • Number of small-scale enterprises accessing affordable credit and financial services from banks and financial institutions.
   • Volume or value of invoice financing products offered to SMEs by banks.
3. Indicator for Target 10.2
   • Degree of inclusion of small businesses in financial services compared to large corporate clients.
   • Changes in lending criteria and their impact on SME access to finance.

4. Table of SDGs, Targets and Indicators

Source: ft.com