Cash Flow

The Asset Based Finance Association (ABFA) has reported that the amount of invoice finance secured by UK businesses has risen by over a quarter in the last five years and that the total amount of UK lending secured through invoice financing has hit a record and passed the £20 billion mark this year for the first time.

Invoice financing is becoming an increasingly mainstream method of finance allowing businesses to raise funds secured against the value of the invoices they issue to customers, as a means of unlocking precious capital. As reported by ABFA, 80% of asset based finance is invoice finance, with the remaining 20% representing asset based lending where businesses can secure funding against assets such as plant, machinery and inventory.

ABFA reported earlier this year that whilst invoicing financing is popular across all types of businesses, it seems that small businesses across the UK are turning to invoice financing in increasing numbers. Reports by both ABFA and the Royal Bank of Scotland’s invoice finance arm indicate this could in part be down to challenging market conditions following the credit crunch, with the more traditional lenders perhaps reluctant to lend to small enterprises. ABFA adds that during the credit crunch many UK businesses have suffered from delays in receiving payment of invoices, so it is no surprise that more businesses are turning to invoice financing as a method to boost cashflow, expand order books and fund growth.

However, ABFA has recently reported that the record high seen this year has primarily been driven by the UK’s larger businesses (with a turnover above £100m), with an 18% increase seen in the amount secured over the last year.

Jeff Longhurst, Chief Executive of ABFA, commented that ‘there’s increased appetite for Asset Based Finance amongst the UK’s largest businesses. More of these large companies now view it as one of the primary sources of funding, which has pushed the total amount of funds advanced past the £20bn barrier.’ ABFA’s report suggests that this could be down to continued fears of a potential Brexit credit crunch with large businesses seeking to diversify their funding away from solely traditional sources. There is also speculation that companies could be turning to invoice financing as a way of locking in exchange rates to reduce the risk of a weakening pound post-referendum.

Interestingly, ABFA adds in its report that the total number of businesses securing asset based finance has only risen by 1% over the last year, meaning that the growth is not in the number of businesses securing finance, but in the amount being financed. ABFA explains that although businesses are increasingly using asset based finance there are still some businesses unaware of the finance options available. In a report by Lloyds Bank – ‘Business in Britain’ – earlier this year it was estimated that British small to medium enterprises are owed more than £500 billion by customers and that these businesses also own almost £2.5 trillion of assets that could be used to fund further growth. Stephen Everett, head of product and propositions for Lloyds Bank, Global Transaction Banking, stated that ‘nearly a third of businesses told us that late payments were affecting their cash flow. Different types of funding such as invoice finance or asset-based lending can help unlock the working capital that they need, allowing businesses to grasp more of the opportunities that exist at the moment. Unless businesses look at ways to unlock the value tied up in these assets, both they and the UK economy overall are likely to be held back.

So whilst it seems ABsolutely FAbulous that asset based lending is currently in its billions, it could in fact be trillions if more UK businesses were aware of the finance options available to them.