With traditional sources of working capital for SMEs in limited supply, businesses are increasingly exploring alternatives.
Asset-based lending (ABL), usually incorporating factoring or invoice discounting, was once considered the lending of last resort, but times have changed and this reputation is now largely unfounded. So what is ABL and what kind of businesses does it suit?
ABL generates finance against a company’s existing assets including stock, debtors, plant, machinery and property. Most ABL is done in conjunction with an invoice discounting facility, so it is most suitable for businesses that supply goods and services on credit, business to business. Very few lenders will look at businesses where the end customer is a consumer.
ABL is particularly good for start-up businesses, because as sales rise, the availability of finance rises with it. But the reverse is also true, and many established and stable businesses are seeing their ABL facilities diminish due to falling sales. Sales-linked finance facilities such as invoice discounting and ABL have been proven to help businesses grow far faster than with a more restrictive, traditional overdraft facility.
Lenders generally like a spread of good quality debtors, so businesses with just a single or a few customers may struggle to get a facility. If debtors are well spread, quality becomes less of an issue.
People often think ABL is more expensive than a traditional overdraft but this is not usually the case. Costs vary enormously, but generally the stronger the business, the more negotiating power you will have.
For a list of Asset Based Finance Association member firms visit www.abfa.org.uk.