Asset-based lending: All you need to know

Asset-based lending is one of the fastest-growing forms for business finance in the UK: so here's a quick guide about it.

As far as origins are concerned, accounts vary. I have heard various: Ancient Mesopotamia; Rome; Medieval England. But as far as the ‘modern’ incarnation of asset based finance is concerned, it came to the UK from the US in the 1970s and hasn’t really looked back since. 

In 2015, Members of the Asset Based Finance Association (ABFA), which represents the industry in the UK and Ireland, are providing funding of around £20 billion to 44,000 British and Irish businesses, significantly exceeding the amount lent to SMEs through overdraft.

ABFA Members supported clients with a total turnover of over £290 billion in 2014 and we expect it to be near enough £300 billion for 2015. More finance is being provided to more businesses than ever before. But there is potential for the industry to support many more businesses still.

Clear terminology

As an industry we have always had a tendency to confuse, so let’s just be clear about some of the terminology from the outset. Asset Based Finance (ABF) is a form of commercial finance provided to client businesses based on their assets. The most significant asset many trading businesses will have are the unpaid debts owed to it by its customers.

These are represented by its invoices hence Invoice Finance (IF) is the biggest form of ABF in the UK.  (Within IF, there is also Factoring and Invoice Discounting but we’ll leave them to one side for the time-being…)

In addition to IF, the other significant type of ABF in the UK is Asset Based Lending (ABL). Invoice finance is normally provided by purchase of the debts owed and so is not, strictly speaking, a form of lending.

However with an ABL facility, funding will normally be provided against debts and also against a wider pool of assets that the client business may hold.  These may include stock or inventory, work in progress, plant and machinery, property and also intangible assets such as intellectual property. Taken in the round, this provides a borrowing base against which the client can draw-down as necessary.

ABL has long been popular with larger businesses but it is increasingly a viable option for smaller businesses as well. As Chief Executive of the ABFA, it will not surprise you to read that I – humbly – submit that it makes an awful lot of sense for businesses of all sizes. 

ABL will normally unlock a far greater quantum of funding that other ‘traditional’ forms of finance. In addition, the finance will track the growth in the client business; as turnover and the asset base grows, the availability of funding automatically follows.  This frees up senior management time to focus on growing the business. 

Because ABL is secured against the assets it is affordable as well, and will normally be highly competitive with other forms of business finance. It is also increasingly accessible, with technology meaning it is available to many smaller businesses as well as the larger businesses that have used it in the past.

The Alphabet Soup

As an industry we need to do more to get the message out, however, and our terminology doesn’t help. We are not alone in this – the UK benefits from a pretty innovative ‘alternative’ finance landscape but the alphabet soup of products and schemes often just confuses businesses seeking finance.

Better awareness of what is available, how it works and where a busy SME can get it has to be key. The British Business Bank’s Business Finance Guide is a good start, providing an accessible and informative summary of a huge range of funding choices.  But there is a lot more that must be done.

We also need to address questions of trust.  SMEs need to be able to use the funding that is available with confidence. For that to happen, finance providers need to be clear about the standards they will meet and those standards must be enforced. 

This is why the ABFA has established a Standards Framework with an independent Professional Standards Council and an independent Ombudsman that is available to client businesses.

For more information about asset based lending and invoice finance please go to UK Finance.

See also: Weighing up asset-based lending

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.

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