The demand for alternative funding has increased since the difficulties SME’s have been experiencing in getting finance from traditional banks. The Asset-Based Financing Association reports that Invoice Discounting is up 16% year on year at £62.5Bn during the final quarter of last year. During the same period the Bank of England reported a 2.4bn contraction. Less than 100,000 businesses in the UK use these products, and potentially 250,000 more can effectively make use of this form of financing.
The Bank of England also recently added factoring corporations to its list of organisations enabled to tap into the Funding for Lending Scheme. This means that more money is available for SME’s.
Another interesting development in the Asset Finance Market is the growing popularity of Private Debt Funds. Pension funds, insurance companies and private groups are either creating their own funds or investing their assets in these funds; thus there is a whole new emphasis on the way that credit is being provided. This can only benefit the struggling SME who is having difficulty getting a traditional bank loan.
Asset Based Financing can be better than an overdraft (from the SME’s perspective) as it is more flexible and can release more funding, as and when the SME needs it.
Whilst more businesses are taking advantage of this form of financing, there are many more that can potentially benefit. One of the problems she sees is the slow take-up of Accountants and Business Advisers of the concept. They do not fully appreciate the working capital enhancement that invoice discounting offers. Often “factoring” is a “dirty” word. Times have changed and old prejudices should be reviewed. Invoice Discounting is effectively the same as Factoring, in as much as it releases funds from the unpaid invoices, but the way the products operate differs.
Having been involved in this sector for over 25 years, Simon Belton can attest that many businesses do not fully appreciate how Asset Based Lending can not only generate working capital, but it can provide a capital base on which to underpin growth. Good use of invoice financing requires a discipline sometimes missing in smaller businesses – solid accounting systems and a good paper trail.
So what is Invoice Discounting? Basically a business can borrow up to 80% of the value of its invoices. This provides immediate additional working capital. There is a small charge (typically around 1% of the value of the invoice) and interest is payable whilst the invoice remains unpaid. The business thus gets working capital at a level related to its sales. As the amount invoiced increases, so does the potential available funding. As a consequence cash flow problems are eased.
Often it is down to the SME to find out what he can about asset based lending. Many don’t understand the terminology or what the product actually does, so it is important to seek out the services of a competent and reputable specialist in this field.
How does an SME go about getting Invoice Discounting? The first thing to do is to find an adviser who fully understands the ‘ABL’ market and the providers of the different products. The adviser has to be able to fully understand the needs of the SME so that he/she can ensure the right fit between the lender and the requirements of the business.
As a consultant in this market, Simon Belton is able to offer an impartial unbiased opinion, providing personal attention to the needs of business owners. Every case is unique, and every solution must be tailored to suit that businesses individual requirements.
One of the perceived problems in the Asset Based Lending market is lack of regulation in the sector, and many advisers are wary of this. However, recently, more is being done to ‘self regulate’ certain aspects encompassing the ambiguity that can arise in some documentation. The sector will benefit from more transparency within the legal documents and widen the popularity of this under-used financial resource.
By using an established and reputable adviser, the SME can protect itself against possible shortcomings and benefit from the boost in working capital to support growth.
For more information about how we can help you source the right finance tailored to yor individual situation, contact us.