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Asset-based finance

invoice payment design

There’s a lot of talk around at the moment about asset-based finance. But what exactly is it - and could it be a good method of funding for your small business?

Asset-based finance is the raising of funds using your existing assets as security. Assets can include invoice finance, - where business secure funding against the value of unpaid invoices - stock, equipment and property. According to the Asset-Based Finance Association ABFA, asset-based funding in the UK breaks down into roughly around 80% invoice finance and 20% the rest.

Asset-based finance is growing in popularity. According to data compiled by ABFA it provided over £20 billion - around 15% of UK’s business turnover - in 2015. Interestingly this is higher than the comparative European figure of 10% of turnover. The data showed countries like France and Germany at the forefront of the proportion of the European economy currently supported by asset-based finance.

So, what are the potential benefits of asset-based funding? The most common advantages quoted are:

  • It enables significant business funding to be raised without sacrificing equity
  • Its ratio of cost to capital raised compares favourably to other methods of business funding
  • It is a cost effective way of improving working capital
  • It can be used as part of a wider strategy of how to grow a small business
  • It is a flexible way of managing fluctuations in cashflow and responding to business needs.
  • It enables greater amounts of money to be raised than most unsecured business loans yet uses assets not typically allowed as security on a classic UK business loan.

There is plenty of potential around at the moment for asset-based lending. The government-owned British Business Bank (BBB) launched an initiative in late 2014 called ENABLE, which aimed to improve the provision of asset-based finance to small UK businesses. Its first ENABLE Funding transaction was completed in October 2015 with Hitachi Capital and it has recently confirmed its commitment to asset-based finance by announcing the provision of £51 million to lender LDF to make funds more readily available for asset-based funding. According to Reinald de Monchy of BBB: “This second transaction in the ENABLE Funding programme will further boost the availability of asset finance for businesses across the UK.” The BBB is set to announce further partnerships with lenders throughout 2016, leading to anticipated business funding packages worth between £25 and £150 million.

So, are there any potential disadvantages with asset-based finance? Is it really too good to be true? There are indeed some concerns about its relative lack of regulation which, according to James Sherwin-Smith, CEO of Growth Street, “enables some lenders to hide the true cost of this credit …. the fees found in the small print usually constitute the majority of the cost. The lack of price clarity available to SMEs means small firms are paying more than they should for commercial finance.”

If you are looking into additional business funding to grow your small business then do investigate asset-based finance. But as always make sure you read the small print to be clear about the costs of this type of lending. If, after due consideration, you decide that a business finance loan is more appropriate for your needs then why not get in touch with us at Fair Business Loans to see if we might be able to help you!

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