Asset based finance into the mainstream

Asset based finance into the mainstream

Jeff Longhurst, Chief Executive Officer of the Asset Based Finance Association (ABFA) which represents the invoice finance and asset based lending industry in the United Kingdom and the Republic of Ireland.

With the economic recovery prompting some revival in business optimism, now is the right time for businesses to consider what options are available to them to fund investment and growth. That’s leading more of them than ever before to use asset based finance.

At any one time, ABFA Members are now advancing almost £20 billion in funding to businesses across the UK and Ireland, supporting clients with a combined turnover of almost £300 billion in 2014.

Invoice finance and wider asset based lending have long been seen as a key alternative to ‘conventional’ sources of finance such as overdraft and term loans. However the changes in the business finance landscape in recent years have meant that asset based finance is no longer just an alternative. It’s now firmly in the mainstream, as a core part of the funding suite for businesses of all sizes.

But what factors have driven this move into the mainstream? Firstly, the speed and flexibility with which an ABFA Member can provide funding mean that businesses can get their growth plans off the drawing board and into reality more quickly than they could with a traditional lending product.

Asset based finance providers are able to ‘look through’ the business to the strength of the client’s underlying assets – in particular to its debtor book, as represented by its invoices.  By looking at a client’s true strengths, rather than being solely reliant on often out-of-date financial indicators contained in the accounts, for instance, an asset based financier will often be able to provide more funding more quickly.

The industry has evolved to provide funding against a wider range of assets beyond the invoices (factoring and invoice discounting – referred to collectively as invoice finance) that marked the industry’s origins. Wider asset based lending packages now make up around 20% of the total funding provided by ABFA Members.

Through asset based lending, funding can be provided against a range of other assets, including stock, plant & machinery, property and also intangibles such as IP and forward income streams.

Another advantage of asset based finance that has come to the fore in recent years is its scalability. The funding available through asset based finance grows as the client grows and this can free up senior management to focus on building the business rather than spending time worrying about securing additional funding as the business evolves.

Asset based finance can also help businesses deal with ever-increasing payment terms from large customers. Long waits for payment, which have become increasingly common in recent years, can quickly impact on a company’s cash flow and its ability to take advantage of opportunities. Invoice financing offers a cost-effective solution as it enables companies to free up their finances in order to cover fluctuations in cash flow and deploy funds at short notice.

In addition, invoice financiers are often able to provide a range of additional services to their clients, including collections, credit control and sales ledger management (in factoring).  This can be particularly helpful for smaller businesses, effectively allowing them to outsource their credit control to specialists and focus on growing their business.

In addition, both factoring and invoice discounting can be provided with bad debt protection on a ‘non-recourse’ basis, whereby the finance provider takes on the risk of non-payment.

For growing businesses looking to find funding to make the most of their opportunities, asset based finance is now a key option within the funding toolkit.