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 and invoice discounting, which will both involve funding provided against outstanding debts.
Invoice finance can be used to support cash flow and release funding for investment by generating money against unpaid invoices. Invoice finance is available to businesses that sell products or services on credit to other businesses. The funding provided tracks the growth in the business – increasing turnover unlocks more funding.
Asset-based finance: information on invoice finance
- Factoring involves provision of finance through the purchase of invoices by the financier (the factor), representing the debts owed to the business. The factor will advance the majority of the value of the invoices on notification with the balance of the value made available once invoices are paid by the debtors. The factor works on behalf of the business – managing the sales ledger and collecting money owed by customers.
- In effect, 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.
- Factoring can be provided on a recourse or non-recourse basis. The latter incorporates protection for the client business against bad debts.
- Invoice discounting is similar to factoring, however, the client business retains control over the administration of the sales ledger. An invoice discounter would want to satisfy itself as to the quality of a client business’s sales ledger systems and procedures. Invoice discounting can also be used to support exports.
- Supply chain finance (also, reverse factoring) is where smaller suppliers can take advantage of the credit strength of their 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.
Asset-based finance: information on asset-based lending
- In the past asset-based lending has been 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 usually provided on a similar basis to invoice finance, with funding being 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 also potentially intangibles such as intellectual property or forward income streams. Asset-based lending can be used in mergers and acquisitions, management buyouts and also turnarounds.
- Whereas invoice finance would ordinary be provided on the basis of purchase of the debts outstanding, (and so in strict legal terms it cannot be correctly described as lending), asset-based lending would normally involve taking additional security over the assets in question.
Providers of asset-based finance in the UK
The majority of providers of asset-based finance in the UK are members of the Asset Based Finance Association (ABFA). Client businesses that use a member of the ABFA are covered by an independent Standards Framework; this includes a Code setting out the standards that can be expected and an independent Professional Standards Council. In addition, the majority of client businesses of ABFA members will also have access to an independent complaints process currently provided by Ombudsman Services. Further detail about the Standards Framework is available at: abfa.org.uk/standards.
You can check whether a finance provider is a member of the ABFA at: abfa.org.uk/members/memberslist.asp