Asset Based Finance – a solid investment

With banks reluctant to lend and lacking the cash flow to sustain operations and to back growth, business are turning their physical assets into finance.

 

The term “asset based finance (ABF)” describes a number of commercial finance products available to business, which involves funding provided by a financial institution on the basis of the assets contained within a client business.

The two best known ABF products are factoring and invoice discounting. Factoring provides companies with working capital to operate their business, together with an outsourced sales ledger and collection service, plus the option to transfer the risk of debtor failure to the financial institution. Invoice discounting is similar, but for business that prefer to carry out their own credit control. It provides funding together with the option to insure the debtor risk and can be provided on a confidential basis without disclosure to the debtors.

Both enable a business to draw money against its unpaid sales ledger in the form of an advance from the financial institution based on an agreed percentage – typically 80% to 85%- of the value of the sales ledger to the business, effectively using the unpaid invoices to secure the funding. The remainder is available to the client when the customer pays, less the financial institution’s fees.

In order to provide invoice finance, the financial institution will need a detailed understanding of the products and services provided by the client business and, most importantly, the nature of the debts that will arise. They will want to understand a potential client’s debtor base, which industries it operates in, how those debts will typically perform, payment terms and so on.

Debt factoring is an excellent source of alternative finance for small business that have little business or personal security and are looking for short-term funding for their business. Asset financing should be typically used for short-term finance borrowing and has the added benefit that facilities are secured on the underlying assets and generally no additional security is required. However, businesses need to be careful of the tie-in periods, the terms of the contract and the costs involved.

Our research shows that when they need help with funding, business owners will go to their accountants before their bank manager. Working closely with their accountants, the whole process can be made easier. Accountants actively monitor the funding provider and if they fail to deliver as agreed in terms of the service levels and turnaround they stop recommending and working with them. It is a joi ned-up approach between the lender, the accountants and the business owner and, crucially, the fact that accountants act as an intermediary gives confidence to the lender and to the business.