Last month the UK’s asset-based funding association released its results. Sotiris Kanaris speaks to the chief of the group Jeff Longhurst and examines the part asset-based finance is taking in closing the funding gap.
Last month the Asset Based Finance Association (ABFA) made a bold claim on behalf of its members that asset-based finance by the organisation in the UK would break through the £20bn (17.7bn) mark in 2015.
The ABFA’s Annual Confidence Survey of its membership showed that its 40 members expect over £20.8bn to be advanced to businesses at the end of the year, up from £19.4bn in December 2014, when the average advance in the fourth quarter of 2014 was £445,867.
The data is in part collected by the UK’s Finance & Leasing Association (FLA), with which the ABFA shares and cooperates on data, according to chief executive officer at ABFA Jeff Longhurst.
"We coordinate with [the FLA] a great deal on policy and government affair matters and we always have and will continue to do it," says Longhurst.
"The FLA is a bigger organisation. It has a dedicated research department, so the FLA collects the statistics from our members for instance. We work closely with the FLA in a number of areas, and with the British Bankers Association."
Longhurst believes asset-based finance is fortunate to have reached large volumes without having the boost of the middle-ticket market.
"As an industry we have gone from alternative finance to mainstream without getting the benefits from being in the middle-market where the growth is pushed, because the [UK] government likes funding options that are more alternative," he says.
"The majority of growth is coming from loans to businesses turning over more than £100m or between £10-£50m. Invoice finance is a product which was initially used by small businesses, but we’re now seeing large corporations using it as they come to realise its benefits as they look to grow," he says.
At the end of last year, invoice finance accounted for 79.8% of the total value of loans given to businesses through asset-based finance.
While accounting for a smaller proportion of the ABFA’s loan book, 20.1%, asset-based lending facilities provide a broader mix of funding including revolving and amortising structures against the entire range of business assets.
Longhurst explains that often companies use different types of asset-based finance over the course of their development.
"One would expect that factoring would often be used by smaller businesses and as those businesses grow they can move on to invoice discounting and ultimately on to asset-based lending," he says.
According to the ABFA, the rise in the use of invoice finance and asset-based lending is primarily driven by businesses funding their growth plans as well as switching from of traditional term loans or overdrafts.
"The industry is good in terms of analysing the worth of an asset before funding against it and that enables our members to be much more flexible in the level of funding they give," says Longhurst.
"I think businesses are beginning to realise that they can use asset-based finance to unlock not just the working capital but support their capital requirements to go forward."
The considerable rise in the amount of funding to UK businesses through asset-based finance over the past few years has not translated to a higher number of clients, which has remained relatively stable.
Despite the high number of SMEs which are currently using asset-based finance, the ABFA believes it should be much higher.
Longhurst says: "What we have to do as a body and as an industry is to start being more focused on those smaller businesses and show them ways we can help them grow their business.
"We hope that when they realise that bigger businesses are using invoice finance, they will be more turned on towards it."
He adds that the reason behind the limited increase in the number of SMEs turning to asset-based finance is their lack of confidence.
"I think the real issue has been the lack of demand by small businesses. I think their confidence has been severely shaken by the credit crunch and as a consequence they are not prepared to take that brave step forward to invest in people and new products. They are concerned that the recession is not really over," adds Longhurst.
At the end of March, the Small Business, Enterprise and Employment Act received Royal Assent. One of the aims of the new legislation is to help SMEs access finance by providing more information about alternative sources of finance beyond clearing banks.
Longhurst believes it could help the asset-based finance industry to attract more SMEs.
"The Small Business, Enterprise and Employment Act can prove beneficial to SMEs, as they will get to know more ways to get loans," he says. "At the same time it will benefit the asset-based finance industry as SME finance providers.
"The legislation is making sure they get the right sort of advice and appropriate funding according to their needs."
A large percentage of ABFA members’ clients come from three industry sectors. The services sector accounted for 30.3% of clients at the end of December 2014, while the manufacturing and distribution sectors had 29.4% and 24.5% respectively.
The ABFA expects the vast majority of clients will continue to originate from these sectors in the near future.
Longhurst says other industries are starting to embrace asset-based finance, giving as an example the construction industry.
"Some of our members have created products for the contruction industry, even employing their own quantity surveyors to help with negotiations and valuations," he says.
Matthew Davies, director of policy and communications at ABFA believes the asset-based finance industry has developed at a faster rate than other finance industries since the credit crisis, primarily due to the nature and use of the industry’s products.
"Perhaps our industry has grown a bit faster compared to others," Davies says. "Overdrafts have been going down for a number of years, while the leasing industry has only recently began to get back on track again. When you think that our product is all about cash flow, then it tends to be one which companies require earlier in a sales gap. For leasing products companies usually need to plan a bit more."
Despite peer-to-peer platforms entering the market, Longhurst believes that they have not put pressure on asset-based finance providers.
"We haven’t seen an increase in competition from these platforms because most peer-to-peer is for medium-term rather than short-term finance," Longhurst comments. "There are a couple of platforms being set up, Platform Black and Market Invoice, but their level of business is small."
Future plans of the association
The ABFA plans to maintain the self-regulatory framework which it launched last year as well as develop the education and training it provides.
Through the association’s self-regulatory framework, complaints by members’ clients go through a professional standards council; if appropriate they are referred to the UK’s Financial Ombudsman.
The ABFA believes the framework can be a tool to boost smaller businesses’ confidence in the industry.
In 2014, the association offered 60,000 hours of training and education to its members. It is currently investing in a learning management system.
"We’ve always provided education to our members; we just want to become more sophisticated in the way we deliver it," says Davies.
"In addition, the learning management system will be another way to ensure that people dealing with our members will know that the staff have been more than adequately trained," Davies concludes.