Three key considerations:
- Asset-based finance is a form of debt-based business financing, where lenders make funds available, secured against the company’s assets. It is only available to established businesses with assets and trading history.
- All forms of asset-based finance can be used to release much-needed cash flow for the business to use as needed.
- There are four main types of asset-based finance: factoring, invoice discounting, supply chain finance, asset-based lending, each of which is described in more detail below.
Asset-based finance in the UK
Asset-based Finance or ABF is a collective term used to describe invoice finance (IF), and asset-based lending (ABL). Invoice finance includes factoring, invoice discounting and supply chain finance.
Factoring is used by smaller SME businesses to support cash flow by generating money against unpaid invoices.
It is available to businesses that sell products or services on credit to other businesses.
The factor will advance the majority of the value of customer invoices (usually 80-90%), with the balance made available once invoices are paid, less charges. The factor works on behalf of the business – managing the sales ledger and collecting money owed by customers. This relationship is transparent, and customers of the business will be aware that a factor is involved.
Factoring combines the provision of finance with a service element, helping the business with credit control, which can be particularly valuable for smaller businesses.
Export factoring is also available to support businesses selling internationally.
Invoice discounting is similar to factoring, but can be more appealing to larger businesses for two key reasons:
- The business retains control over the administration of the sales ledger. In this way, the invoice discounting company will remain a “hidden partner”, which may appeal to businesses for a variety of reasons. Customers of the business will continue to be invoiced as normal, and the financing relationship is purely between the business and the invoice discount provider.
- The funding provided tracks the growth in the business – increasing turnover unlocks more funding.
Supply chain finance
Supply chain finance, sometimes called reverse factoring, is where smaller suppliers can take advantage of the credit strength of larger customers.
Supply chain finance requires the involvement of the supplier and their customer, and up to 100% of the value of invoices can be funded once they have been approved by the customer, often at more competitive rates than would otherwise be available.
Supply chain finance can be accessed directly through some larger organisations and also through a growing number of alternative providers.
In the past, asset-based lending was seen as a more sophisticated product for larger small and medium-sized enterprises (SMEs) and mid-sized corporates. However it is now increasingly available for smaller businesses as well.
Asset-based lending is provided on a similar basis to invoice finance, with funding extended against debts. But in an asset-based lending arrangement this is complemented by finance against a wider pool of assets, typically including stock, property, plant, machinery and sometimes intangibles such as intellectual property or forward income streams.
This maximises the cash available to the business to support future plans. Asset-based lending can also be used in mergers and acquisitions, management buyouts and turnarounds.
To explore the other finance options for your business, go back to the Finance Journey tool.