Asset based funding: underused and untapped

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A recent assessment from The Bank of England’s Q3 Credit Conditions report found that “credit availability for smaller firms had improved and was approaching normal levels.”

It’s fair to say that in my thirty-plus-years in the financial services industry, I have never seen so much money chasing so few business customers. Whether peer-to-peer lending and crowdfunding or traditional banking channels, SMEs are swamped with lending options.

It’s clear, however, that many SMEs don’t want to take on further debt to grow their businesses.

But even if business owners don’t want to extend credit lines further, or take on new lending, there’s a significantly untapped asset, which is much closer to hand and already owned by the business – it’s invoices.

This Autumn, the Asset Backed Finance Association (ABFA) reported that British small and medium sized businesses are owed a staggering £67.4 billion in unpaid money, a £18.9 billion increase since 2011[1]. Literally billions of pounds of potential funding is left untouched by SMEs who could be borrowing against their invoices to secure vital short-term funding.

In our SME Confidence Tracker, worryingly we are now seeing emerge an underlying hesitance and caution amongst small business owners and decision-makers. Less than half of SMEs expect their business to grow in the weeks leading up to the new year, while 16% are resisting investment to focus on building up their cash reserves.

This conservative approach extends to a focus on the upkeep and maintenance of their existing businesses, replacing broken machinery and equipment, rather than investing for growth.

But smart investment now will position a small business ahead of competitors and ready them for that next big business decision: whether that’s exporting into overseas markets, adding a product line, or hiring a new intake of skilled staff.

When funding was tight SMEs had no choice but to hold-back on growth opportunities. Now that the market is awash with capital just waiting to fund growth plans, we must encourage our small business owners to be more ambitious in their outlook in order to keep fuelling sustainable growth. Though just one option available to SMEs, it has been encouraging to see asset based finance take a higher profile in such discussions over recent months.

Right now, there is a fantastic opportunity for SMEs to reach out to secure the funding support they need, not just for day-to-day orders but for growth.

If you’re interested in finding out more about unlocking working capital, check out some of our client case studies on the Daily Telegraph website here.

Reflections on the changing funding world

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Some onlookers thought that 2015 would be the year when we might be able to move on from the fallout of the financial crisis, with UK banks finally forgiven for their past misdemeanours. There were positive murmurs from the Government and a clear desire to get on with the vital work of restoring trust and confidence in the financial services sector.

Indeed, in his June Mansion House speech, Chancellor George Osborne spoke about the UK financial services industry’s capacity to be the best in the world, with “more competition, more innovation and more players in retail markets.”

The industry expected an end to the loathed bank levy as a result, but surprisingly Mr Osborne levied a new surcharge of 8%, applicable to all banks and building societies, including ‘challenger’ banks, which he previously appeared to embrace.

Defending this seeming U-turn, the Chancellor said “the banking sector has to put something back into the economy, so there will be no changes to the tax surcharge this fiscal year.”

It seemed that all was neither forgiven nor forgotten.

This ongoing stasis in relations with the banks is regrettable mostly because of the unintended consequences of legislation and regulation. The sad truth is that the weight of a tightened regulatory burden falls on the shoulders of UK businesses – the very organisations the Chancellor is hoping will power us on to continued economic growth.

With European and global regulation forcing banks to meet ever-higher capital and liquidity requirements, banks are increasingly unable to lend to businesses. This is even more severe in the case of SMEs and start-ups, who are considered high-risk. As the banks move to shrink their balance sheets, they are also largely exiting many forms of business lending.

It simply doesn’t make financial sense anymore for the banks to lend to businesses.

An even hand

As the head of a large independently owned financier, many may think that this is welcome news to me. But the reality is that – in a business’s funding tool-kit – there is a place for traditional forms of lending, in addition to non-bank forms of funding.

From overdrafts to invoice finance, leasing to bank loans, the market needs a full range of offerings to meet small businesses’ needs.

At present, however, the current media landscape portrays SMEs as having an ‘either or’ option. Either secure funding from a bank or peer-to-peer (P2P) lenders. But there are other avenues for businesses.

You would expect me to highlight invoice finance, but leasing and asset based lending are two other viable forms of business funding.

If SMEs rush to P2P lenders, in place of more established forms of funding, they are putting their faith in – as yet – unproven and untested players that only offer funding pure and simple, without value added services, such as sales ledger management, credit control or payment collection.

A recent Evening Standard article discussed rumours of a looming P2P lending failure and it is my belief that the Chancellor must be even-handed in highlighting risk within the financial system. This includes extending appropriate warnings about newer forms of finance to both SMEs searching for funding and investors looking for returns.

The Chancellor should also remember that the UK has a significant tradition of independent asset based financiers. At any one time such funders provide £19.3 billion in to businesses and this significant contribution to employment, growth and output must not be taken for granted.