The brutal economic climate may have constricted business credit, but asset based lending is one area which continues to grow.
The industry suffered a major downturn in 2009 and members of the Asset Based Finance Association (ABFA) saw the turnover of their clients fall to £190 billion, down 9 per cent on the £207 billion recorded in 2008. However, the sector has rebounded strongly, with client turnover hitting £211 billion in 2010 and £240 billion the following year.
Kate Sharp, chief executive of ABFA, says one of the reasons for this rebound is the rising demand for the product from larger firms. “In the good times, when banks are freer with their funds, you see a lot of smaller firms going towards invoice finance. In the bad times, more large firms use it,” she says.
According to Andrew Charnley, global head of open account product at Barclays, changing patterns in trade have also been good for the industry. “The opening up of new trade with growing economies has led to an increase in trade done on an open account basis,” he says. “Chief financial officers want greater control and flexibility over cash receipts, borrowing and liquidity management, which has led to a greater attraction for asset based finance facilities.”
It is arguably a product suited to recession, because in uncertain economic times it follows that lenders want greater security for the money they advance.
Lenders can often only take a floating charge on standard loans or overdrafts, whereas asset based lenders can obtain a fixed charge on a business, giving them control of the sales ledger and making them the first creditor in line if things go wrong. This discrepancy has encouraged lenders towards offering this product instead of overdrafts.
It follows that all the UK’s major banks now have large asset based lending divisions, which compete with dozens of well-capitalised independent firms.
Supporters of asset based lending say it is a flexible and convenient financing method, which allows firms to borrow in line with their growth at a low cost.
For firms of any size the basic principle of asset based lending is that a business uses an asset, typically an invoice or its sales ledger, as security for an upfront loan.
With factoring, which is designed for smaller firms, invoices are handed to a factoring firm, which will typically lend up to 90 per cent of the invoice value upfront, then pursue the balance from the debtor.
It is arguably a product suited to recession, because in uncertain economic times it follows that lenders want greater security for the money they advance
Invoice discounting works on the same principle for larger firms but, crucially, it allows the borrower to retain control of its sales ledger.
There are issues to consider with this type of finance, particularly for smaller firms, and the product does have caveats which can create a fine line between a business succeeding or going bust.
Factoring involves authorising a third-party firm to pursue a client for debts, so there is a risk to the client relationship in outsourcing credit control in this way. There is also the issue of pricing and fees.
Alongside the fees charged for the service, there is the issue of termination fees, which kick in if a business ends the contract prematurely, either by switching provider without notice or going into insolvency.
Asset based lenders have received bad press about their use of termination fees recently, but ABFA’s Ms Sharp says the issue is exaggerated. “I cannot say no firm has done something unacceptable, but the number of complaints is incredibly small.” she says.
Tracy Ewen, managing director of asset based lender IGF, warns businesses to make sure they understand the terms of the service before signing up. “All asset based lenders operate different charging structures,” she says. “To ensure there are no surprises, prospects should read their agreements carefully at the outset and, if necessary, take independent legal advice.”
While the industry is in good shape, lenders and trade bodies acknowledge this is partially down to renewed demand from larger firms.
Among the small and medium-sized enterprise (SME) community the desire to borrow is not as strong. Chris Hawes, of RBS Invoice Finance, explains: “Our clients are borrowing less on average and looking for other ways to finance their business strategies. Our own view is that borrowing appetite is generally cautious.”
ABFA statistics confirm this. As of June 2012, asset based lenders had advanced £16 billion to businesses, an annual increase of 2 per cent. The funds available also rose from £22.5 billion to £23.3 billion in the same period, but total sales figures of clients showed little change.
So the funds are available, it simply depends on whether businesses can be convinced to opt for asset based lending instead of other forms of finance.
