How Asset Based Finance can help businesses
By Kate Sharp, Chief Executive of the Asset Based Finance Association (ABFA)
The asset based finance industry has been around since the 1960s in the UK and the origins of the main products in use today go back to the financing of international trade hundreds of years ago.
Over the last half-century these products have evolved significantly and continue to do so. Factoring is the ‘original’ product and, by its nature, remains the most visible. A factor will purchase the debts and normally collect them from the client’s customers. It remains an ideal product for smaller businesses that may not have a dedicated collections team in-house, plus there is the option to insure against debtor failure. Most importantly, it frees up management time to run and develop the business. Factoring is and will remain an essential method of providing finance to smaller businesses.
But since the late 1980s more funding has been provided through invoice discounting (ID) arrangements, and last year the number of ID clients pulled clear of factoring for the first time. Unlike factoring, the client normally retains responsibility for managing its sales ledger. This means the costs of the facility tends to be lower and the client’s customers will often be unaware that an external financier is involved. Asset Based Lending (ABL) is the third product offered under the ABF banner. Where invoice discounting and factoring are revolving cashflow facilities, ABL solutions normally offer a combination of a revolving cashflow facility based upon the receivables and stock and an amortising loan secured on other assets within the business.
Generally speaking, ABL tends to be more of an option for mid-sized and larger businesses. It delivers sophisticated solutions for a variety of scenarios including growth, MBOs, MBIs, mergers and acquisitions, refinancing, turnarounds, and public to private transactions. Understanding a client business, its challenges, risks and opportunities is an essential part of what the ABF industry does. Rather than relying on often out-of-date financial information, an invoice financier will make a funding decision based on their understanding of the client business, its customers and the underlying strength of its assets. This will often mean that greater levels of funding could be unlocked than might be the case with more ‘traditional’ types of finance.
Asset based financeis highly suitable for growing businesses as the funding grows in line with sales, eliminating the need to constantly rearrange funding lines. Knowing that the available funding tracks business growth is a huge benefit to many companies. Funding decisions are also based upon the inherent strength of the business (i.e. the product and the customers) and not just on the strength of the balance sheet making it available to a wider range of potential businesses. With the UK government looking to refocus the economy on increasing exports, ABF is the ideal type of funding to support international trade. One of its key advantages is providing expertise and local knowledge at both the debtor and creditor ends of a transaction. For any business, but particularly for a small business wishing to dip its toe in overseas waters, ABF’s suitability in managing export risk makes it an ideal form of funding.