Asset-Based Finance: a Guide for Small Businesses

Asset-Based Finance: a Guide for Small Businesses

What is asset-based finance, and is it really the best funding option for your business?

By Craig Farmer

Obtaining the right kind of finance to expand and grow your business is a constant pressure point for small business owners. With the high-street banks less willing to lend to small businesses than they once were, it’s forced companies to look elsewhere for the funding that they need.

Fortunately, there are now plenty of options available to small businesses beyond the banks, thanks to the emergence of alternative finance. As well as peer-to-peer (P2P) and online balance-sheet lenders, which can facilitate funding in a matter of days, another form of alternative finance that’s proving particularly popular is asset-based finance.

All small business owners looking to diversify the funding they have available to their business should consider whether asset-based finance offers the flexibility they are looking for with their financial arrangements. However, it’s worth noting that asset-based finance comes in numerous forms, including:

Business owners should take the time to assess which type of asset-based finance is right for them.

What is factoring?

Factoring companies advance a percentage of the value of outstanding invoices to your business. When the invoice is settled, the rest of the invoice value – minus the factor’s fee and other potential costs such as bad debt provisioning – will be paid to your company. The factoring company essentially acts like an external credit control service, chasing your customers for the settlement of invoices, and processing payments. This means that your debtors are aware of you having this facility.

Advantages of factoring

Disadvantages of factoring

 Matter of factor
Matter of factor:

Factoring companies lend against the value of unpaid invoices, and will take over your company's credit control function

What is invoice discounting?

Invoice discounting works in a similar way to factoring, albeit with one key difference. As with factoring, the invoice value minus a fee and any other associated costs is advanced to your business, but you’ll retain responsibility for chasing invoices, rather than a third party.

Advantages of invoice discounting

Disadvantages of invoice discounting

Customer relationships can potentially be damaged if the factor acts in a manner that upsets your client, in order to get your business’s invoices settled.

What is asset-based lending?

The basis for this kind of lending is to secure the loan against a wide range of assets. These could be stock, property, plant or machinery, and even intellectual property. If a business defaults on its payments, an asset-based lender can seize the asset from the business, and sell it to pay off the remaining debt.

Advantages of asset-based lending

Disadvantages of asset-based lending

On the line
On the line:

Defaulting on an asset-based loan could result in the seizure of company property

Alternatives to asset-based finance

Asset-based finance is of course just one way your business could secure the funds it needs. If asset-based finance isn’t possible for your business, or it simply doesn’t fit with your ambitions, alternatives such as unsecured loans, lines of credit, overdrafts and revenue-based finance could be more appropriate.

The key is to look closely at what kind of finance your business needs, and what you intend to use the money for. Factoring and invoice discounting can be ideal to free your cashflow, for instance, but a secured or unsecured loan, an overdraft, or a revenue-based finance facility could be more useful. However, look closely at the cost of each type of finance, and the terms and conditions under which you are agreeing to the loan. Don’t forget, for example, that overdrafts are repayable on demand from your bank.

By thinking about all of the available options, you’ll be able to identify the most affordable type of lending for your business.

 

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