Lloyds shuts invoice financing service as small businesses feel squeeze

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Lloyds Banking Group is closing its invoice finance service for small business customers as the UK’s largest lenders focus on more lucrative corporate clients.

The UK’s largest high street bank will close its bill taking service by the end of the year, according to two people familiar with the matter, in a blow to small enterprise customers who operate on razor-thin profit margins.

The wind-down move, under which Lloyds buys unpaid invoices from small businesses in exchange for the right to receive payments from its customers, follows similar closures by other major lenders.

It comes as businesses face rising costs following increases in the minimum wage and successive tax hike budgets by Chancellor Rachel Reeves.

“As cost pressures rise in employment, business and energy rates – and as interest rates fall – banks must take a more generous stance to help small business owners access working capital,” said Craig Beaumont, executive director of the Small Business Association.

Invoice factoring is the process of selling outstanding customer invoices to a bank or finance company at a discount in exchange for cash up front. The service is generally used by small businesses to smooth their cash flow and free up resources by outsourcing payment collection to an external agent.

Banks initially moved to factoring in hopes of attracting small business clients and then selling other, more profitable products.

But running the factoring business profitably can be difficult, as small and medium-sized companies tend to use it, which does not generate significant profits for banks, while cross-selling has been limited, according to people working in the industry.

Lloyds, which says its corporate purpose is to “help Britain prosper”, is the latest of the UK’s big four banks to scale back its factoring for SMEs, as the banks focus on larger, more profitable corporate clients.

NatWest and Barclays closed their factoring businesses several years ago, according to people familiar with the matter. Meanwhile, HSBC has tightened its service standards, limiting them to customers with annual turnover of more than £1m.

Many small businesses rely on invoice financing products because of a broader problem of late payment suppliers, Beaumont said.

Nathaniel Southworth, managing director of toy distributor KAP Toys in North Yorkshire, said he had used factoring facilities from several major banks, but over the years lenders had imposed stricter criteria around revenue and profits, excluding companies like his.

“The mentality of traditional banks is that they want a company’s financials to be nice, uniform and easily predictable,” he said. “I’d like it to be that way too. But the reality of business is that’s rarely the case, and I think sometimes small businesses can feel left out.”

Lloyd’s declined to comment. A person close to the bank said the bill collection department was modest in size and that Lloyd’s would continue to provide other similar services to customers to ensure they did not experience major disruption. The person added that the bank is working to grow its lending business to SMEs and that its factoring products are used by less than 1 percent of its SME clients.

HSBC said it was “committed to supporting small businesses… including helping them access the most cost-effective lending products to meet their needs.”

A person close to Barclays said the bank continued to provide other invoice financing services. A person close to NatWest said its factoring unit had fewer than 1,000 clients by the time it closed in 2021 due to falling demand.