Asset based finance sector outperforms wider economy


WE are all too aware that the UK economy has struggled to recover and grow following the recession, with GDP growth dropping to just 0.2 per cent and with rising inflation and taxes, as well as low productivity, this trend looks set to continue – at least for the near future. The availability of credit to businesses has also remained broadly unchanged during the second quarter of 2011 and the general perception within the business community is that access to funding remains challenging. Nevertheless, recent figures from the Asset Based Finance Association (Abfa) show a contrasting story, with the industry seeing its fifth consecutive quarter of growth in June 2011.

The asset based finance sector has a history of growth during periods of economic stress. During the previous UK recession, between 1989 and 1991, the industry averaged 24 per cent growth per annum and this trend has been repeated following the 2009-2010 recession, with advances growing an average 7 per cent over the last five quarters.

This intrinsic ability to perform well while the wider market is struggling is largely due to asset based finance products offering a unique combination of greater levels of finance for the client while also reducing the risk for the lender.

So far this year, Abfa has released three strong sets of quarterly figures. The 2010 year end figures, released at the beginning of 2011, demonstrated an 8 per cent year on year increase in total lending as well as a £1bn increase in advances from members to £14.9bn.

First quarter 2011 figures also showed notable growth with total advances increasing by 9 per cent year on year, whereas wider bank lending contracted by 2.5 per cent in the same period. These figures also showed turnover growth of 15 per cent year on year, with total client sales in the quarter at £55.8bn. Furthermore, asset based lending outperformed all other types of business lending during the first quarter of 2011.

The latest figures for the second quarter of 2011, released in early September, show a fifth consecutive quarter of growth with total advances from members up 12 per cent year on year (see chart, near right) – the first time the industry has seen double digit growth since the recovery. The latest figures also show that there is still capacity in the system, with advances at only 71 per cent – or £15.7bn – of available funds. The total approved finance, based on the firms’ sales ledgers, for the second quarter of 2011 was £22.2bn, meaning that £6.5bn is still available to clients.

Of the total funding provided by Abfa members, small and medium enterprises (SMEs) received almost 40 per cent, or just over £4bn this quarter. Over half of the industry’s clients are small businesses with turnover below £1m, and a further 41 per cent of firms are medium sized businesses with turnover below £10m. In 2010, growth in advances was greater for the largest clients; however, the last quarter showed the gap between advances to larger clients (turnover above £100m) and SMEs contracted (see chart, far right). This decreasing gap in the level of advances between SMEs and larger clients suggests a growing confidence among SMEs as they become more comfortable with increasing debt levels. This is also supported by total clients’ sales growing 14 per cent over the past year to reach £59bn.

From the figures above, it is clear that the asset based finance industry is currently thriving, and one of the key components contributing to its success is the fact that all asset based finance products – factoring, invoice discounting and asset based lending – offer access to finance based upon a firm’s outstanding trade debts. Typically clients can access immediate funding of around 80 per cent to 85 per cent of the outstanding invoices – with the remainder paid as the debt is settled – and asset based finance products can also offer a number of additional benefits, including;

Facilities that grow in line with the business, eliminating the need to constantly rearrange funding lines. Products such as factoring offer the user additional administrative support – something that small or growing businesses often find extremely helpful and cost effective

Funding decisions based upon the strength of the product and the customer rather than the strength of the client’s balance sheet; which can vary depending on the market condition at the time of the funding application
Low risk compared with most other form of lending

Clients using these types of solutions are also becoming more diverse, a trend which is likely to continue as businesses and lenders increasingly appreciate the products’ low risk and two-way appeal. Larger companies are also beginning to understand and appreciate asset based structures, with an increasing number of larger companies using this type of funding for acquisitions and management buy-outs (MBO) and management buy-ins (MBI). Furthermore, equity finance houses are turning to asset based lenders more regularly as preferred funding partners.

In addition, products such as invoice discounting and factoring can help banks to meet their “Project Merlin” quotas, with banks increasingly using this type of finance as a channel to extend funding to businesses without significantly increasing their own risk and compliance requirements.

Despite being well established in the UK and experiencing robust growth and increasing interest from a diverse client base, the asset based finance industry is still in a relatively early stage of development compared to many other forms of lending. As more and more markets become aware of the benefits of asset based finance we can expect to see increased visibility and usage of the products.

By using asset based finance methods, greater levels of finance can be made available to solid businesses that may have been held back by a lack of liquidity. The above evidence suggests that asset based finance has been, and will continue to be, an important product in the economic recovery.