Member Article

Asset based lending: vital financial solutions for SMEs

In the world of enterprise, we tend to put a lot of stock into flair, innovation and hard work as the tool kit for success. The UK’s small business community has all of these qualities, but it is ultimately finance that makes things happen. Funding provides the vital means for a business to grow. Therefore the importance of being aware of all of your credit options and securing the right product cannot be overstated.

However, the problem many SMEs face is the range of financial options out there. Straightforward loans and overdrafts are often a port of call, while the UK is also home to some of the worlds most developed angel investor and venture capital communities. With our enormously advanced financial markets, retail bonds and AIM listings are further options that may warrant consideration. That doesn’t even touch on the different government and local grants that are on offer. So how does a small business owner decide which route to take?

One way is to identify a significant challenge, and consider what financial products can effectively address it. Late payments is one biggest challenges small businesses face today. According to BACS payment systems the burden on SMEs now totals £40billion, and the Asset Based Finance Association (ABFA) has shown that the issue has worsened since the recession, with the average delay in receiving payments rising to 72 days.

Invoice finance, a popular form of asset based lending, provides one way for small enterprises to unlock cash-flow tied up in delayed payments. It can provide access of up to 90 per cent of the value of issued invoices within 24 hours, as a lender effectively buys the unpaid client bills from the business. For SME owners who want to continue growing, irrespective of arbitrary payment delays, invoice finance can be an ideal solution.

As the economy continues to grow, more small enterprises will be considering bold investments in new assets. Yet as every SME owner will know, these assets can be expensive and meeting the upfront cost can be a real challenge, regardless of how successful a business is. This is where another asset based lending facility can help - asset finance. An intermediary buys the asset, whether it is a crane, vehicle fleet, or brand new piece of cutting-edge technology, and the customer pays the lender back in small chunks. This ensures that a business can get its hands on assets which can enable it to take the next big step without having to worry about steep, upfront costs.

These asset based lending options are becoming increasingly popular. The ABFA statistics show that £19.4billion of asset based finance was provided for UK firms in the last quarter of 2014, and it’s showing no signs of cooling down. The market has recorded its strongest start to a year since the financial crisis, with new business up by 16 per cent in the first five months of 2015. However the visibility of these products can still be overshadowed by the sheer weight of everything else that is on offer. Banks need to continue raising awareness of these products, but the onus is also on SMEs to discover all of the options out there.

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

This was posted in Bdaily's Members' News section by Roger Brown .