With lenders reporting record advances to clients in recent months, we look at how asset based lending works in practice, and if it offers a solution to businesses who may have experienced difficulties securing finance from ‘traditional’ sources.
What is asset based lending?
Before we start, it is worth noting that the terminology used within the ‘alternative’ finance industry can be a little confusing.
Asset based finance is a catch-all term, which includes factoring, invoice discounting, and asset-based lending (ABL).
Whereas the first two products advance funds to clients based on the value of outstanding invoices, asset-based lending advances funds based on the value of a company’s assets.
An ABL lender will advance money based on the value of assets which can include equipment, property, and even intellectual property. A huge amount of money is typically tied up in these assets, and lending will typically be made available against the sales ledger as well as these assets.
- Current assets include outstanding invoices and the company’s inventory.
- Fixed assets include property, machinery and other equipment.
- Intangible assets include the value of brand names and trademarks.
Who uses this type of lending?
The asset based lending industry originated in the US, and expanded to our shores in the late 1990s. It has become increasingly popular since the last recession, as traditional lending has become increasingly hard to secure.
ABL is a popular alternative to bank lending as it can provide more flexibility, and it is scaleable – so a lending facility can evolve as the demands of the client change. Unlike a traditional overdraft, an ABL facility is unlikely to be withdrawn at short notice.
So, is ABL something small business owners should look into?
Probably not – unless you have a high turnover, and significant value tied up in your business assets.
Unlike invoice-based products, asset based lending is typically aimed at larger companies and is often used to finance mergers & acquisitions, restructuring and management buy outs – situations which are clearly more relevant to established firms rather than your typical SME.
Things may change, however, as the industry becomes more established. Last year (2014) RBS announced plans to extend its ABL to smaller firms. Previously only available to firms with a £25m+ turnover, RBS will now lend to SMEs in the £10m – £25m turnover band.
How popular is this type of funding?
The latest figures released by the the industry’s trade association, the ABFA, show that a balance of £18.8 billion had been advanced to clients as of March 2015 via asset-based finance products (including factoring and invoice financing), a 6% rise on the previous year’s figures.
For further information, try the ABFA website for useful background information, and details of prospective lenders.
If you’re a small business owner, you may be more interested in products which lend against the value of your outstanding invoices (to protect your cash flow). Read our guide to invoice finance and factoring here.