How does asset-based lending work in the UK versus peer-to-peer?

Peer-to-peer lending might be tightening up, but asset-based lender IGF has increased its lending 39pc year on year

Earlier this month, alternative finance sector attracted attention when Funding Circle’s share price fell sharply on the back of a downward revision to its revenue growth forecast.

Citing Brexit-related economic uncertainty, the peer-to-peer (P2P) platform — which listed to fanfare and optimistic growth forecasts last October — suggested fewer SMEs were seeking funding and announced plans to tighten its lending criteria and scale back expansion plans.

While concerns have been raised about the alternative finance industry’s ability to weather an economic downturn, it’s worth remembering that the sector is broad with a vast array of operators serving a wide range of clients. There is also demand for funding – research conducted by Independent Growth Finance (IGF) revealed 71pc of SMEs were looking for new funding in 2019 – but it may not lie in the P2P sector for the near term. When it comes to asset-based lending (ABL), we have found SME businesses to be bullish in their outlook.

What is causing this mismatch?

P2P lending platforms largely run online with minimal interaction between borrowers and investors. Great for investor privacy, but it does not allow for borrowers to seek guidance, negotiate improved terms, or further investment. P2P focuses on an instant need for finance instead of long-term provision.

P2P loans are highly dependent on market fluctuations and, above all, the health of the economy. With so much uncertainty, it’s clear to see why Funding Circle slashed its revenue forecast in half this year. Perhaps P2P lenders aren’t seeing the demand because SMEs, knowing the risks associated with the P2P route, are seeking other funding options.

Typically, in periods of economic uncertainty, losses are expected. Speculation rises as any reduction in lending in the P2P sector can push shares or fund portfolio values down.

In contrast, those using asset-based lending are better insulated because the funding is based on assets held by a business and not the external environment. The flexibility of an ABL facility allows companies to be funded against existing plant and machinery, property, and inventory, acquiring additional funding as it grows.

How do SMEs navigate the tricky landscape of funding?

Small businesses have been at the forefront of conversations over the past few years. Government and key funding leaders have implemented new programmes to support SMEs in economic uncertainty – to limited success.

In our research, the most common response when asked about the challenges facing the future of their business, was Brexit. With 90pc expressing concerns, most of the talk is about the effects on imports and exports. Lenders need to be tapped into these conversations to be able to provide adequate consultation and advice to SMEs. Financial decision makers are keen to learn about all possible funding solutions.

‘Our funding provision has grown 39pc compared to the 2017/18 financial year, which in July meant we hit £100m’

At IGF we have seen no shortage or lapse in demand for funding. In fact, our funding provision has grown 39pc compared to the 2017/18 financial year, which in July meant we hit £100m client funds in use. Highlighting the fact that SMEs show no sign of standing still and are bullish about their future.

Businesses across the country need to look at bespoke funding packages. One size doesn’t fit all. Business leaders should look for lenders that can offer fast, flexible and bespoke solutions that enable them to reach their goals.

While traditional bank funding remains the primary lending source for most organisations, more than a quarter (27pc) say they use invoice discounting or asset-based-lending. From an SME perspective, businesses with a strong asset portfolio will benefit most from an ABL facility.

What is asset-based lending, and how does it differ from P2P?

An asset-based lending solution combines revolving facilities against trade receivables and inventory with term funding against fixed assets and potential cash flow loan. This means businesses can have the right mix of structural debt and access to funds for working capital. An ABL solution, therefore, covers not just the immediate working capital requirements but can also provide appropriate funding lines through a period of growth and development.

Asset-based lending is a medium to long-term solution that is suitable for a range of commercial situations. Relationships and expertise are at the heart of any solution.

By contrast, peer-to-peer lending often requires less of a time investment up front or has lower ‘entry’ requirements. This can appear to be the easy option for an SME. However, this financing option isn’t able to grow with the business and cannot adapt to support an SME through its various stages of growth.

Market volatility and risk

There are plenty of options for businesses looking for a financing partner, from high-street banks, peer-to-peer solutions, and other alternative lenders. What asset-based lending can provide is a facility tailored to the specific needs of a business, with minimised execution risks. In times of economic uncertainty or a downturn, the facility is insulated against market volatility, unlike P2P options. This goes some way to explaining Funding Circle’s share slump, and the growing demand for other alternative financing solutions.

The economic future is uncertain but asset-based lending is poised for continued growth.

Jon Hughes is commercial director of asset-based lender Independent Growth Finance (IGF)

Further reading

Asset-based lending: All you need to know


Jon Hughes

Jon Hughes is commercial director of asset-based lender Independent Growth Finance (IGF).

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Growth Funding