Asset-based lending - what is it and how can it help my business?

Business finance is difficult to come by. Despite a general improvement in the economic climate, viable and exciting firms across the country continue to find themselves stifled by a lack of credit. Asset-based lending provides these businesses with a scalable, efficient way of accessing the cash they need.

The difficulties associated with accessing finance have meant that many business owners are looking for alternative methods ways to fund their ventures. Asset-based lending is rapidly becoming one of the most popular such methods. Indeed, a recent survey by Investec suggests that more than 25 per cent of ‘serial entrepreneurs’ plan to use this type of finance to help fund their businesses this year.

But what is asset-based lending, and how can it help your business?

What is asset-based lending?

Asset-based lending describes, simply, any loan that is secured against an asset. You might, for example, borrow against the value of equipment, premises, or stock. But many business owners do not want to risk losing these assets in the event that they cannot repay the loan. As a result, more and more firms are turning to factoring facilities.

A factoring facility allows you to borrow against the value of the invoices you raise. You pass your invoices onto your factoring partner, who can then pay you up to 90 per cent of their face value, within as little as 24 hours. The factoring partner will then collect payment of the invoice from the customer and, when the invoice has been settled, they will pay you the remaining value less a service charge.

What are the benefits of factoring?

Factoring is a significantly less risky proposition than conventional business finance. As a business owner, factoring can be more attractive than a loan secured against other assets – simply because you do not run the risk of losing your premises or equipment if you run into financial difficulty.

Factoring also helps to tackle one of the biggest issues faced by any business owner – the problem of cashflow. These facilities can help you regulate your cashflow, reducing the potential for late payments and therefore helping you to plan your finances more efficiently.

As your factoring partner takes responsibility for ensuring that invoices are settled, you can spend your time running your business – rather than constantly chasing customers for payment. Even better, many factoring arrangements are now ‘transparent’; in these situations any contact between the factoring partner and your customers will appear as if it has come directly from you, meaning that clients need never know you are using a factor.

Finally, unlike a regular business loan, factoring provides a truly scalable finance solution. As your sales ledger grows, so too does your borrowing power. This ensures that your factoring facility can support your business during each stage of its development.

When is factoring most commonly used?

In the past, factoring was used almost exclusively by ‘distressed’ companies – that is, firms that were having difficulty paying their debts. Today, though, perfectly healthy businesses are recognising the potential uses for this type of lending, particularly in an environment in which conventional business finance remains scarce.

Factoring is now often used by firms that wish to expand, and are looking for a flexible, affordable way of financing their growth. Factoring can provide the short-term cash injection that your firm may need to seize opportunities for expansion, before your competitors get there first.

Similarly, factoring arrangements enable you to cope with unexpected expenses as and when they arise. If you need a cash boost to tide you over, factoring can be an efficient and affordable way of securing it.

The days in which asset-based lending was seen as the last resort for firms on the rocks are well and truly gone. Instead, this type of finance has increasingly important applications for firms that wish to take advantage of the significant opportunities presented by the current economic climate – but that are being let down by the banks’ inability or unwillingness to lend.

The lack of availability of conventional business credit looks set to remain a hot topic for businesses across the country, even as the UK economy continues its return to sustainable growth. But there is no reason for you to place your growth prospects at the mercy of the banks. If you want to expand your business in a sustainable way, asset-based lending may well be the right choice.