Asset-based finance (ABF) is a popular funding arrangement in the US, used by everyone from small businesses to large corporations. ABF in the UK has a much lower profile and has been described as being the exclusive preserve of smaller companies and entrepreneurs, and even perhaps a last resort to manage cash flow.
Asset-based finance is a specialised method of providing working capital and loans that are secured by invoices, inventory, machinery, equipment and/or real estate. This type of funding is great for startup companies, refinancing existing loans, financing growth, mergers and acquisitions, and management buy-outs and buy-ins.
There are signs however, that we in the UK are beginning to reassess our stance towards ABF thanks to recessionary pressures and banks clamping down on traditional loans and overdrafts. In light of new financial regulations such as Basel III, banks are looking in greater depth at risk analysis. Invoice lending and asset-based products are recognised as being less risky for financiers. According to the Chief Executive of the Asset Based Finance Association; “if you look at the way the markets work in the US, they are totally risk-focused. And right there at the top, the first type of low-risk, senior secured debt you will be offered is asset-based finance.”
There are around 4.5 million businesses in the UK, but only about 1% currently use ABF, however up to 10-15% could use it according to the MD of Lloyds TSB Commercial Finance. The problem is getting businesses to be aware of alternatives to traditional bank finance – businesses still think ‘loan’ first when trying to raise working capital.
Another popular form of ABF is invoice discounting, where a business can borrow against its debtors. Such arrangements are distinct from factoring, in which a company effectively relinquishes its credit control to a third party in return for cash. The big difference between factoring and invoice discounting is that you keep control of your sales ledger with invoice discounting, you collect the debt, and it is more confidential. However there are ongoing monthly service fees that are payable regardless of whether funding was required that month. For those who prefer to stay in control of their cash flow and credit management and sell only the invoices they choose to rather than have to sell them all there is an alternative and cheaper solution. MarketInvoice is an innovative online marketplace for invoices that enables UK businesses to raise short-term finance or improve cash flow by enabling them to ‘sell’ invoices raised, to investors via online auction.
Although all the high street banks have a commercial finance wing that offers asset-finance products, technology has already unleashed a wave of non-bank competitors, all specialising in individual products that can help businesses raise finance for starting up or for growth. Some would argue that is the future for commercial finance, alternative options operating in the mainstream with banks.