Raising Finance

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Banks increasingly offer asset finance rather than loans to SMEs

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According to the challenger bank, led by former RBS executive Paul Lynam: “Our business and commercial division is now able to offer SMEs a full suite of solutions to achieve the funding their business needs to grow. Secure Trust provides SMEs with an offering that is unmatched by high street lenders. Our customers are able to benefit from fast decision-making and transfer of funds along with local advisors – as well as the support of a major financial institution.”

The move comes as small businesses increasingly borrow against assets as they struggle to secure loans from banks. Asset-based finance loans rose to more than £25bn last year. The Asset Based Finance Association has reported an increase of over ten per cent in terms of funds out over the last year alone. The official figures show that lending to SMEs by the traditional high street banks has fallen, highlighting the increasing role of specialist finance providers in filling the funding gap.

According to research from BDRC, 30 per cent of SMEs were using finance facilities such as overdrafts in Q2 2014 compared to 36 per cent in the same quarter of 2012. At its peak, four in ten SMEs were using these products.

Stephen Hodges, CEO of Close Brothers’ banking division, is a long time advocate of asset finance rather than overdrafts for SMEs. Asset finance is a loan that is secured against some or all of the assets of the company. This is often machinery and equipment or other tangible assets, but it is also possible to borrow against stock, property, or accounts receivable. Companies can even borrow against future cash flow.

“I believe that too many SMEs rely on bank overdrafts. Instead they need to be thinking about alternative sources of finance,” he said. “Overdrafts are a poor way for SMEs to borrow money. Banks can pull a loan ‘on demand’, without any notice, leaving companies with little or no time to find the means to repay them. And SMEs often find that overdrafts are insufficient to meet the cost of the new machine tools or vehicles that are needed to fulfil the big new contract.”

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He believed that banks are increasingly unwilling to lend to SMEs because of the additional risk they bring. “By their very nature, small businesses are riskier to lend to, because they tend to be at an earlier stage of their growth, without much of a strong balance sheet to support that sort of finance,” he said. “It is not realistic to expect high street banks to give SMEs this type of loan because they run the risk of losing their money if the economy turns and the business goes under.”

At Close Brothers Hodges oversees about £3.3bn in lending to small businesses across the UK, and he explained that it is vital that entrepreneurs, business owners and managers think beyond overdrafts and seriously consider using other sources of finance: “These can include business angels – wealthy individuals who are prepared to invest their own capital in start-up companies in return for an equity stake; peer-to-peer lending – where individuals can lend money to other individuals directly, with a company, typically an online platform, matching lenders and borrowers; or putting their balance sheet to work through invoice finance and asset finance.”

SMEs often fail to realise there is a lot of value sitting on their balance sheets and waiting to be unlocked, believed Hedges. “Asset finance is a quick and simple way to unlock that value,” he said.

“Asset finance is often combined with an invoice finance facility,” said Hodges. “Combining both short and long term assets in this way can free up even more value in a company’s balance sheet, by unlocking the cash held up in unpaid invoices so companies do not need to wait for their customers to pay them.”

This type of lending facility can also grow in line with the business. “It means money is available quickly to bridge any gap in the business life cycle – say for hiring additional staff to fulfil a new contract, or for buying additional stock in anticipation of seasonal demand. In short, a source of financial flexibility that is so vital for a young, growing business,” he concluded.

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