The Asset Based Finance Association (ABFA) found in 2016 that an average of £9.5bn was advanced to SMEs using either invoice finance or asset-based lending products – up 3% from £9.2bn in 2015.

ABFA says SMEs are learning that “they can leverage the value of assets such as outstanding invoices”. This is why our association keepsreminding commercial finance brokers that finding funding is only part of their role; theother half is education.

So ABFA’s statement tallies well with the NACFB’s annual figures, but the real story is that bank overdrafts reportedly fell during the same period, albeit very slightly. According to data from the Bank of England, SMEs’ outstanding bank overdrafts fell by 2% to an average £12.4bn last year.

Movements of 2-3% are not particularly newsworthy, but the correlation is interesting; could it be an early indication of the need to make overdrafts more attractive, or is this simply an issue of availability?

Bank overdrafts are cheap to run and set up,and the rate of return is good for the lender. While the NACFB has high-street lenders as active patrons, and is grateful for their presence and influence, we also want to make sure small businesses realise there are alternatives.

The broader the choice, and the broader the range of what small business owners know about, the greater the likelihood that they will hit on the ideal solution to a problem. So we certainly want the big names to hang on in there and to keep their long-standing presence but at the same time to work on innovations to keep everything competitive.

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We are not really talking about cheaper overdrafts – from our perspective, overdrafts work as a catch-all but are rarely the perfect solution to SMEs’ financial needs. Businesses do come to us occasionally looking for £1-£2k, and we tell them that is not really a commercial-sized loan.

A more challenging interpretation of the trends in the ABFA’s data is that bank overdrafts are not being relied upon in the way they were previously, because – in theory at least – they can be withdrawn or reduced at short notice. So by seeking an alternative secured against invoices or hard assets, you are insulating yourself from a possible sticky situation months down the line.

SMEs have reason to want to avoid overdrafts; many have stories of overdrafts being reduced or called in when they needed them most. As long as the pressure is on lenders (andbrokers) to follow the best of best practice – a mission that remains one of the NACFB’s priorities in 2017 – then a borrower should have complete faith in their choice of funding source.

The big news story is that asset-based finance to UK and Irish businesses at the close of 2016 had risen by 13%, reaching an all-time high of £22.2bn. Businesses with annual turnovers in excess of £100m were advanced £8.1bn of asset-based funding at the close of the year – a 33% rise between 2015 and 2016.

ABFA said invoice finance – which allows businesses to release working capital tied up
in unpaid invoices – accounted for as much as 80% of asset-based debt, and that this funding is increasingly being used by businesses to fund mergers, opportunities and new projects.

The key here is that businesses should look further than their bank statements when
assessing the value of their business. Almost every investment is liquid, now that there is such a wide spread of funders and funding types to choose from.

Norman Chambers, deputy CEO, NACFB