At a time when the banks' lending to SME businesses continues to fall and the Enterprise Finance Guarantee loan book is contracting, is the time right for asset-based lending?
Small businesses continue to struggle to get loans and credit from UK banks, who missed the Project Merlin lending targets. This is placing increased pressure on the working capital of small businesses and overdue trade invoices continue to rise.
Is asset-based lending the answer?
Asset-based lending (ABL) was once considered the lending of last resort, but times have changed and it is now a realistic alternative to conventional cashflow lending. At the end of 2011, total ABL advances exceeded £16bn.
Across the UK and Ireland more than 41,000 businesses use such facilities, which include factoring, invoice discounting and more comprehensive ABL. These facilities are linked directly to a company 's turnover so are less restrictive than traditional overdrafts and grow with the business. The ABL provider can also include a credit management service to collect and credit insure overdue debts. Furthermore some ABL providers include Enterprise Finance Guarantee loans in their offering.
Who are the ABL providers?
The ABL market is split between the bank owned ABL providers and the independents. The bank owned sector can be further split into the primary UK banks, with the majority of the ABL lending, and the foreign bank owned ABL providers.
The market can be further divided by those that offer purely sales-linked finance; factoring and invoice discounting, and by those that include comprehensive ABL leveraged against stock, plant and machinery, property and intangible assets.
There are over 50 ABL providers in the UK and Ireland, with more than 95% being members of the Asset Based Finance Association, of which Smith & Williamson is a founding affiliate member.
Which businesses are most suited to ABL?
Fundamentally a typical ABL prospect must sell on credit terms on a business to business basis. UK and export sales can be included, as can sales in hard currencies.
The ABL provider would usually like to see a good spread of customers and some good quality debtors. However, spread may sometimes be considered more favourably than quality. Invoices will need to be backed up with signed delivery notes, time sheets or sign off, so the debts need to be clearly provable and enforceable. Similarly, businesses with equity in owned property or plant and machinery and stock may be suited to comprehensive ABL.
Favoured sectors by the ABL providers include:
- manufacturing
- distribution services
- transport
- retail
- construction
- recruitment.
Smith & Williamson has very strong working relationships with all of the ABL providers, factors and invoice discounters. We do not operate a brokerage and take no commission on introductions into the sector.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.