ABF is on the rise in Germany, but the model needs to adapt to compete with tech disruptors

Asset-based finance (ABF) is a sophisticated transactional business funding model and one long-established to provide businesses with efficient access to finance. Since bank lending declined globally in the wake of the financial crisis, the model has re-established itself as a mainstay within the lending space, particularly for SMEs, and consequently, has never been more widely adopted.

In Germany, this form of lending is growing strongly, however, the emergence of FinTechs and new alternative financing models pose a challenge to traditional ABF lenders. If the German ABF sector is to remain relevant, it should adapt to compete with new technologies, raising awareness of its services, refocusing on growth businesses and simplifying its process.


ABF – an established model serving the bedrock of the German economy

The backbone of the German economy is made up of 2.45 million SMEs, contributing almost 55% to GDP and employing 18.3 million people[1], and with bank lending having declined in recent years, these businesses have increasingly turned to ABF and factoring for their financing needs. Indeed, early last year, the turnover of the members of the German factoring association increased by 5.1% to a new total of 244.3 billion Euro.[2]


New alternative finance entrants are disrupting the market

However, since the end of the global financial crisis and the emergence of FinTech, which has rapidly driven competition between traditional and alternative finance providers, ABF has faced greater challenges to remain competitive. These new alternative finance models have disrupted the financial services industry by democratising funding, making the application processes faster and more efficient while at the same time building products around the key principles of speed, relevance and transparency. As a result, funding provided by FinTech companies totalled $40.3bn in 2018 from a standing start 10 years ago[3].

The simple application process and speed with which SMEs are able to secure funding from FinTechs, with examples here in Germany including creditshelf and auxmoney, has been a key reason for the sector’s strong growth. Creditshelf, the online peer-to-peer lending platform has recently announced revenue growth of 37% for the first nine months of 2019, building its profile as a ‘financing designer’ on an easy-to-use platform. Meanwhile, online lending platform auxmoney removes the complexity of traditional bank lending by providing a transparent marketplace to connect credit-worthy borrowers with investors. More than 50,000 investors have used this platform to lend some €250 million in private loans.


ABF should re-establish itself as finance partner to SMEs

The German ABF sector therefore needs to adapt to remain a chosen funding avenue for SMEs, an important part of which is raising greater awareness of its services. Disruptive finance lenders, such as P2P platforms, some of which now offer ABF, and crowdfunding have enjoyed significant growth in recent years – the volume of P2P lending in Germany has now reached €703 million and crowdfunding 500 million Euro and is growing fast. With such exciting growth, these platforms have naturally captured the headlines.

Global ABF industry bodies such as the FCI should collaborate more with leading ABF players in Germany, including ABN AMRO, Societe Generale Germany and Siemens Financial Services to help raise the profile and articulate the benefits of factoring and invoice discounting as a credible solution for growth business funding. Working together, these key industry stakeholders could help to demonstrate that ABF providers have the technology, flexibility and products to match the best solutions on the market to help SMEs with their funding needs. 


Re-focus required on true-growth businesses and broader asset range

Another way the sector should adapt is to re-focus on true growth businesses. Indeed, there has been a recent trend both in Germany and other European countries for ABF lenders to be more conservative, moving up the credit spectrum to target larger businesses. This is supported by data that shows that while the value of loans has increased over the past ten years, the volume of transactions has fallen. For example, and according to research consultancy Round Window, some 62% of ABF advances in Europe go to large companies, with 22%  to medium-sized businesses and only 17%  to small businesses.

Clearly, ABF lenders need to re-connect with smaller business, but they could also benefit from broadening the range of assets on which they are prepared to lend. Given that many growth companies are service businesses, with a significant number in the tech arena, they lack some of the physical assets that traditional ABF lenders will accept. Instead, ABF lenders should consider more intangible assets, such as brands and IP.


Embracing new technological capabilities is critical

Historically, the process around ABF has been seen as challenging, particularly for smaller businesses with limited resources. One area that potentially offers a solution is technology. ABF management software functionality and transaction streamlining has been transformed in recent years. The technology is now able to update collateral values as clients generate invoices in their day-to-day business, thus reducing the lead-time between raising an invoice and receiving funding. The rise of new tech solutions makes ABF and factoring accessible for even the smallest SMEs, as increased speed of service allows companies to receive the funds they need quickly, based on sophisticated data analysis. Advanced tech solutions actually help automate these processes, which means businesses can manage their facility and provide data via a single platform, making the process easier to manage.

In an already competitive German market, alternative finance players driven by technological advances have in recent years considerably widened the range of funding options available to SMEs, introduced greater product diversity and brought far simpler models of funding to market. Despite this, ABF lenders should still be able to thrive and prosper. The industry is becoming more aware of the issues it faces and is addressing them, working in closer partnership with industry bodies, re-focusing on the core SME market and drawing on technology to simplify its process. While there are challenges that the sector faces, the outlook still looks bright for the German ABF sector.


[1] https://www.bmwi.de/Redaktion/EN/Publikationen/Mittelstand/driving-economic-success-sme.pdf

[2] https://www.factoring.de/german-factoring-market-2017  World Factoring Yearbook 2019

[3] https://www.cbinsights.com/reports/CB-Insights_Fintech-Report-Q1-2019.pdf