Asset-based finance is big business these days. Since the financial crash of 2008, banks have significantly tightened their lending criteria and become much more risk-averse – with the result that SMEs are looking to other sources of finance.
As a result, the asset based lending index has risen by 14% in the second quarter of this year in the US and asset-based lending within the UK and Ireland has risen by more than £8 billion in the last ten years to a new high of £22.2 billion in the last quarter of 2016. The vast bulk of this lending was through invoice finance – an extremely innovative solution that can tame a troublesome cash flow forever.
What is asset-based finance?
In simple terms, asset-based finance involves borrowing against collateral owned by your business. Because the loan is secured, risk is reduced for the lender, significantly increasing your chances of being accepted – and being charged a competitive interest rate.
Most borrowers choose asset-based finance because they’ve struggled to be accepted for a bank loan, or found themselves facing sky-high interest rates or a convoluted approval process. In many cases, the businesses may have a short trading history or a compromised credit score, both of which can be huge red flags to a bank.
What can I borrow against?
Practically anything. Even if your record of sales and profitability isn’t stellar, provided your business owns valuable assets and has ambitious (but realistic) plans for the future, there’s a high chance an alternative lender will accept you. You could borrow against your premises, plant, equipment, even stock in hand – or with invoice factoring and discounting, you can borrow against the value of your invoices, the instant you issue them.
Introducing invoice factoring and discounting
When you sign up for invoice factoring or discounting, lenders will typically allow you to borrow up to around 85% of the value of the invoices you issue, with repayment being made when your customers pay you.
With factoring, the finance company will assign experienced credit control professionals to secure early payment, thus minimizing the interest you pay, whilst with invoice discounting you retain control of your own debtor ledger.
Which option works best for you will depend on the strength of your credit control team – for smaller businesses, factoring can effectively outsource all this work, though some companies are uncomfortable with their customers dealing with a third party on unpaid invoices.
What are the advantages and disadvantages?
The great thing about factoring and invoice discounting is that they can put paid to cash flow problems for good – effectively taking problems caused by late-paying customers out of the equation.
They’re also a fast way to get access to cash, whereas other forms of asset-based lending require a fair of due diligence. On the downside, the interest rate is usually quite a bit higher than for a bank loan or conventional asset-based finance, and of course factoring and invoice discounting are only available to business-to-business companies rather than those that sell to the general public.
However, if you frequently find yourself struggling to pay bills, this could well be the way to go – which is why factoring and invoice discounting are now worth some 2,355 billion euro a year globally.
Author: Carl Faulds, managing director of Cashsolv offers advice and alternative finance support to overcome cash flow problems. See how Cashsolv can help provide quick finance and ensure a positive future for your business. Follow @cashsolv on Twitter.