Why asset-based finance can help SMEs grow

The invoice finance and asset-based finance industry has provided more finance to British businesses in 2017/18 than ever before, according to data from UK Finance.

Businesses looking for newer, more efficient ways of funding their growth has led to advances increasing by 13% year-on-year to just over £22bn, the highest figure ever for the industry. But despite the increasing popularity of assetbased finance across UK businesses as a whole, this hasn’t translated into an increased uptake among our growing number of SMEs – despite traditional funding options for these businesses remaining hard to come by.

Recent Close Brothers research found that a mere 16% of SMEs view asset-based finance as their ideal form of business finance, while the Federation of Small Businesses estimate that 79% of small businesses applying for financing are pursuing traditional bank loans or overdrafts, often with little success or with unattractively high interest rates.

That’s despite more than two-thirds of SMEs (69%) with an annual turnover of £10m or more having cash tied up in assets such as plant, property and stock – ideal for asset-based finance, which could easily allow liquidity to be unlocked for a significant number of these businesses.

This is an opportunity missed for many SMEs, as they often struggle to secure finance from traditional sources. This is due in part to an overemphasis on credit scoring and a reliance on data alone, meaning the real picture of the business is often missed.

Many businesses – but particularly SMEs – can have unpredictable changes in their revenue, cash flows and costs outside their control due to an increased vulnerability to changing market trends and preferences. This can cause problems for SMEs attempting to stay within the terms of loans, such as overdrafts, and make such financing more difficult to secure.

Asset-based finance, however, has the potential to protect against the financial fluctuations that many SMEs suffer from, given its ability to be provided against such a wide pool of assets – anything from intellectual property to machinery is included.

This can mean greater affordability, flexibility, fewer covenants and ease of access, with modern lending options able to be based on asset performance rather than solely on debtor value. Asset based finance can also track growth in a business, so as turnover and asset base grow and the business expands, the availability of funding automatically follows.

The influx of new technologies available means it is also increasingly 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. Solutions such as the Lendscape platform help automate and streamline these processes, enabling businesses to manage their facility and provide their data for analysis via a single platform, making the process easier to manage for resource-pressed SMEs.

But more needs to be done to encourage SMEs to utilise these benefits. Better awareness of what’s available can help, as while the asset-based finance landscape in the UK is rich and innovative, it can be confusing for businesses just starting out – according to Close Brothers, 72% of SMEs were unaware that they could secure financing on the basis of their turnover, rather than their credit rating.

Driving support, understanding and the uptake of asset-based finance could release that funding for our 5.7 million SMEs, enabling them to have the truly transformative effect on our economy that they deserve.

Article Written by:

Kevin Day
CEO, HPD Software

First appeared on: Specialist Banking Platform