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August 16, 2011updated 12 Apr 2017 4:12pm

Asset finance users fare better than most

The flexibility of targeted cash flow finance helps cash strapped businesses outperform users of more traditional forms of finance, writes Hilton Bairds Evette Orams Despite a more positive macro picture, it is an unfortunate fact that the financial health of many UK businesses has deteriorated during the six months leading up to April 2011 This is partly due to businesses being faced with a surge in operating costs and a fall in new orders, as suggested by the latest SME Trends Index from Hilton-Baird Financial Solutions.

By Evette Orams

The flexibility of targeted cash flow finance helps cash strapped businesses outperform users of more traditional forms of finance, writes Hilton Baird’s Evette Orams

Despite a more positive macro picture, it is an unfortunate fact that the financial health of many UK businesses has deteriorated during the six months leading up to April 2011. This is partly due to businesses being faced with a surge in operating costs and a fall in new orders, as suggested by the latest SME Trends Index from Hilton-Baird Financial Solutions.

The twice-yearly survey provides a comprehensive picture of the challenges faced by UK SMEs currently and reviews a range of variables, including bad debt levels, tax arrears, turnover and profitability, in order to calculate the financial health of UK firms through the Business Health Index. Findings revealed that the financial wellbeing of UK businesses has declined as the overall Index fell to 0.35 from the 0.49 recorded last November – this despite the positive economic growth recorded in the first quarter.

On closer inspection the situation appears to be more concerning. Of the 576 business owners questioned about their business’ finances and growth prospects, a staggering 76% reported a rise in operating costs during the preceding six months while only 58% of those questioned won new contracts, causing the overall Index to fall considerably since the previous survey.

It is therefore unsurprising that business confidence has taken a major hit as a result. Many businesses have expressed concern over their growth prospects, with only 33% expecting their business to grow in the following six months – a considerable decline from the 45% recorded last November. Over a quarter (28%) are primarily concerned about generating and winning new business during this period, with a further 17% anxious about the rising cost of fuel and new materials and 15% also worried about managing cash flow.

With numerous business concerns in mind, the importance of securing the most suitable and reliable funding solution is paramount. A tailored facility will ensure that your business has the ability to maximise opportunities when they arise whilst protecting the business against common pressures, yet overdrafts and credit cards remain the most popular methods of funding among SMEs and are currently used by 44% and 42% of respondents respectively. Business profitability increase in the past 6 months, by type of finance used

Conversely, asset finance (25%) and invoice finance (21%) solutions are used by significantly fewer despite the study finding that users of targeted cash flow finance fare much better than those who solely rely on more generic, traditional sources of finance, perhaps as a result of the flexible and targeted cash flow support such solutions typically provide.

For example, the Business Health Index revealed that asset finance (0.70) and invoice finance (0.62) users considerably outperformed those using credit cards and loans from family and friends (0.23) and bank overdrafts (-0.05) to fund their business. Further, while 52% of invoice finance users and 47% of asset finance users reported a rise in turnover over the same period, only 40% of those using credit cards and loans from family and friends and 37% of overdraft users were able to boast the same. Similarly, while profitability rose at 41% of both invoice finance and asset finance users, just 33% of those using credit cards and loans from family and friends and 30% of bank overdraft users were able to report the same good news.

As a result, asset based finance users were more optimistic about their business’ future. The research showed that 41% of invoice finance users and 39% of asset finance users expect to grow over the next six months compared to a lower 36% of credit card or loan users and 33% of those using bank overdrafts.

These figures serve to emphasise the benefits of asset based finance solutions and show the crucial support they can provide businesses. The latest Asset Based Finance Association (ABFA) and Finance Lease Association (FLA) statistics further demonstrate how these forms of finance are very much available to businesses of all sizes and highlights the various benefits of asset based finance as a vital funding tool during uncertain times.

It is possible that the majority of SMEs are sticking with more traditional funding options due to a fear of the unknown or simply a lack of awareness to the other options available. Given its flexible nature, invoice finance can supply users with the necessary cash and a facility which grows in line with the business – provided they are using the most suitable facility for their business.

Independent commercial finance brokers are an important resource when investigating suitable funding options. Their knowledge and ability to successfully match individual businesses’ cash flow needs with the most appropriate funding facility can ensure that a business reaps the rewards in the future.

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