Innovation and growth in asset based finance

 

Asset Based Finance Association (ABFA) CEO Jeff Longhurst discusses the drivers and changing perceptions behind the figures, and considers the outlook for the year ahead.

Jeff Longhurst

CEO, Asset Based Finance Association (ABFA)

Jeff LonghurstABFA Infographic

The ABFA reported record usage of asset based finance for Q4 2014, with total funds in use by businesses up to £19.4bn. This figure, which reflects activity in the UK and Ireland, marked a 9% increase on the same period a year earlier and a massive 38% increase in the use of asset based finance since the height of recession in December 2009.

 

There are two key factors driving this growth. Firstly, the recession intensified the focus on cash enormously. It opened eyes wide to the need to ensure cash and liquidity is managed effectively.

Secondly, there’s been a change in perception around asset based finance as a product. Businesses increasingly recognise that this is a product first and foremost designed to support growth.

An efficient mechanism

The biggest increases in demand are coming from the mid-corporates; we’re seeing around a £1.2bn increase in funding to businesses turning over in excess of £10m. For us, that’s a significant shift in the types of businesses using asset based finance over the last few years, with larger (£50m+ turnover) businesses accounting for half of that growth.

What we hope to see is a filter-down effect, with smaller businesses following suit, growing in confidence and recognising the efficiency of this type of funding mechanism.

First choice

Reputation is everything in business. Perceptions have changed for the better, but we still have work to do to get our message across to smaller businesses and their advisers. We need to demonstrate that while asset based finance can be helpful to businesses in difficulty that’s by no means its prime function.

Businesses in robust health have even more to gain. Asset based finance is now recognised as a solid funding choice for growing businesses, not a last resort. Building on that is a key part of our task going forward.

Pushing boundaries

As an industry, we've always looked to push the boundaries. We’ve been innovative in finding mechanics and methods to fund across most sectors, even those where invoicing can be complex, such as construction. In fact, a number of our members now have separate divisions specialising in construction, for example, and that would've been unheard of only a few years ago.

This innovation has been driven by enhanced understanding of how asset based finance can really support and – crucially – keep pace with business growth. The scalability is a massive advantage.

Operational efficiency

A question that arose recently at an Association of Corporate Treasurers (ACT) conference was whether asset based finance increased the administrative burden for businesses. The response from one treasurer was enlightening. He said that while it did involve a need to provide in-depth information, this actually forced the business to look at things differently, to consider how efficient it was in controlling and managing its cash. This had been a valuable exercise in itself.

For me, that anecdote really summed up the layered benefits of asset based finance. It can make your assets work harder for you, and help you to assess operations and strategic goals and promote greater efficiency. This is one of the reasons why I anticipate just as strong growth in mid corporates using asset based lending in 2015.

Key benefits

Can asset based finance offer your business an efficient funding solution?

  • Room for growth. Do you have the capital to support your strategic plans? A review of your funding mix can deliver necessary headroom.
  • Capital purpose. If you’ve a need to finance growth (through acquisition or expansion) or re-structuring then this should be explored as an option. If you anticipate a decrease in sales, it will be less appropriate.
  • Comfort zone. By using business assets to fund growth, asset based finance can remove risk to personal assets.
  • Flexibility. Do you need a solution that grows with your business, however fast that growth occurs? This provides a scalable solution without the need to renegotiate.

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