Once considered a last resort for medium and large sized businesses for credit, asset-based lending is now gaining greater prominence with businesses outside the SME belt, according to figures released today.
Asset-based financing is secured against invoices and other assets, and can be considered a less risky form of finance for funders to provide. This means growing businesses can get even quicker decisions on asset based finance than traditional finance. With asset based loans, however, the borrower assumes the vast majority of the risk. In the worst case scenario, the borrower may lose the asset up for collateral. Borrowers also risk low valuations and over-mortgaging. As with any loan, financial planning is crucial for the short, medium and long term.
According to figures released by the Asset Based Finance Association (ABFA), around 80 per cent of asset based finance is invoice finance, in which businesses secure funding against their unpaid invoices, while the other 20 per cent represents the fast-growing area of asset based lending, in which, in addition to debts, businesses can raise funding secured against a range of other assets they own, including inventory, property and machinery.
Jeff Longhurst, Chief Executive of the ABFA, adds: “Previously, this form of commercial finance had been associated with SMEs but we’re seeing increased appetite from the UK’s largest businesses to secure finance to fulfill growth plans and expand order books.”
“Asset based finance is now an established part of the commercial finance market and there is increased appetite from UK businesses to secure funding through this route. Whilst the availability of finance from traditional sources was relatively slow to recover from the credit crunch, the asset based finance market opened its doors to businesses of all sizes and there remains significant capacity to provide more finance to more UK businesses.”
The amount of asset based finance secured by UK businesses against stock has jumped 22 per cent in just a year, from £499 million in 2014 to £607 million last year.
The ABFA explains that businesses are looking to capitalise on increased demand from customers by drawing down finance against existing stock in order to fuel longer-term growth.
The ABFA adds that the use of factoring amongst SMEs has also increased by 3 per cent, demonstrating that smaller businesses, whilst cautious, are also taking advantage of some of the funding that is available.
Jeff Longhurst explains: “As a response to the uncertain economic climate, more clients are taking advantage of the additional services available to them, such as credit protection, which allows for peace of mind without restricting growth.”
“We’ve seen a significant increase in payments made to clients under these types of facilities which provide assurance to SMEs that they will be protected in the unfortunate event of something going wrong with their debtors.”
The ABFA says that the overall amount of funding provided to businesses through asset based finance – including invoice finance as well as asset based lending – rose by £260 million in the past year to stand at £19.7 billion at end of December 2015.