Asset Based Lending: An Old Solution to New Challenges

Roger Brown is Regional Director for London and East of England at Lloyds Bank Commercial Finance

Finally, Britain’s community of small and medium enterprises (SMEs) is getting back on track. The economy is moving into a sustained period of growth, and confidence is rising. According to the Federation of Small Businesses, the number of SMEs with growth and investment intentions has reached its highest level in five years. Yet even as the outlook changes, many significant challenges remain.

The issues that prevailed during the recession, such as aversion to risk and access to funding, are less of a concern. However even during periods of economic uplift, there are significant obstacles that SMEs have to overcome, and the same is true in 2015.

Many of these challenges are associated with growth. In a growing economy with rising consumer demand, several businesses will be considering expansion. This almost invariably requires new assets, for example, new facilities or equipment, however the initial cost of acquiring these assets can be extremely steep. This puts a business in a frustrating position – it is well placed to incorporate new facilities to its operations, but the upfront cost will require the enterprise to make some painful decisions to balance the books.

Many enterprises may just think this is what buying assets entails, but there are asset-based lending solutions that can help by cutting the cost into incremental payments. There are a variety of asset finance options, but they mainly work by allowing a lender to buy the asset – by hire or lease – and the customer pays the lender back in manageable payments. By enabling more SMEs to meet the costs of facilities they need, asset finance is poised to play a big role as more enterprises look to expand.

Even as the economy grows, not every challenge for SMEs is related to expansion. Late payments continue to cost small businesses dearly, with the burden reaching nearly £40billion according to Bacs Payment Systems. Recent research from the Asset Based Finance Association (ABFA) has shown that the average delay in receiving payments faced by small businesses has risen to 72 days, so even as the economy improves payment delays are getting worse, not better, for small businesses.

Roger Brown, Regional Director, London & East, Lloyds Bank

This can debilitate a SME in the same way that not receiving your monthly pay check on time can really disrupt your plans. It doesn’t matter how great your offering is as a business, if you’re not getting paid for it, you will never reap any benefit. This is where another asset based solution, invoice finance, can provide a helping hand. By enabling an intermediary to effectively buy your unpaid client bills, this financial product can give you access to up to 90 per cent of the value of issued invoices within 24 hours. So if the late payments problem continues to worsen, invoice finance will continue to remain a key credit stream for SMEs that do not want to be hamstrung by arbitrary payment delays.

Given how asset based lending directly addresses two of the main challenges SMEs currently face – purchasing new assets and late payments – it’s no surprise that these forms of finance are more popular than ever.  Recent research from industry body, the ABFA, shows that £19.4billion of this type of finance was provided for UK firms in the last quarter of 2014. Whereas the UK peer-to-peer sector lent just over £500million in the same period. While newer forms of finance are grabbing the attention of financial pundits, they are dwarfed by invoice and asset funding, which are coming of age as a way to deliver growth to SMEs.