The number of British businesses taking advantage of asset based finance to support their growth ambitions has increased, according to new figures that prove the popularity of this traditionally under-appreciated source of funding.
The latest research from industry body, the Asset Based Finance Association (ABFA), showed that the overall amount of funding provided to business through asset based finance rose by £260m in the past year to stand at £19.7 billion at the end of December 2015.
This comes at a time when the UK’s economy is expanding at an encouraging rate post-recession, with almost half (49 per cent) of businesses now expecting trading conditions to improve, against just eight per cent who expect them to deteriorate, according to Bank of Scotland’s Business Barometer.
Although the same report found that business confidence had fallen 17 points to 28 per cent, the ABFA’s figures suggest that businesses are still planning to invest in growth this year, and are increasingly exploring previously underutilised forms of funding to do so.
There is still room for improvement, however. Our latest Business in Britain research shows that awareness of asset based finance is still low, suggesting that businesses in the UK are still not fully exploiting the diverse range of funding options available to them.
So what should businesses be considering when shopping around for different forms of finance?
Invoice finance – the most popular form of asset based lending – continues to make considerable gains, with the number of British businesses with an annual turnover of over £50 million using this option jumping by 25 per cent in only a year, from 713 in 2014 to 893 last year. This option is perfect for growing businesses in a recovering market. It quickly makes available outstanding capital that can be used to pursue investment opportunities.
As a result, it accounts for 80 per cent of the total use of asset based finance in the UK, giving access to up to 90 per cent of the value of issued invoices within 24 hours and releasing funds that a business might not see for up to three months. It also remains an integral part of the financial framework of seasonal businesses, many of which rely on it to protect their cash flow during quieter times.
Outside invoice financing, other forms of asset based lending enable firms to unlock the value tied up in its stock, inventory or property. According to the ABFA figures, the use of such forms of funding is steadily increasing with finance secured against stock, in particular, rising by 22 per cent in a year, from £499m in 2014 to £607m last year.
These figures are encouraging and it’s clear that growing businesses are looking to capitalise on welcome increases in customer demand by using untapped assets to access new funding. In our view, some businesses have neglected to take advantage of the wide variety of funding options that allow them to get investment plans off the ground quickly for far too long.
However, there is evidence that suggests there is still ground to cover. Our latest Business in Britain survey showed that only a third of UK firms are aware of asset based lending. This has to change. Like invoice financing, funding secured against physical assets and stock suits firms at every stage of the growth cycle, providing an option that quickly frees up investment capital without having to sacrifice equity to a third party.
The financial flexibility that asset based lending gives a business is also beneficial to firms looking to grow at their preferred pace. A revolving facility backed against stock or inventory allows firms to capitalise on growth opportunities without having to renegotiate terms, a common and time consuming roadblock for many forms of traditional financing.
At Bank of Scotland Global Transaction Banking, guidance from our teams of specialist, local advisers means the lending process can also be smoother and quicker than for other financial products. It means our customers can make decisions to facilitate growth, like hiring new staff, entering a new market or purchasing new premises promptly.
It is critical to have the support of a lender that appreciates your ambition and is dedicated to providing relationship-led banking that will help you establish the best financing options for your businesses growth plans.
Colin Walls, Head of Trade and Working Capital at Bank of Scotland