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Poor understanding of alternative finance dampens SME growth

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Lloyds TSB Commercial Finance questioned 2,000 SMEs on their awareness of a range of sources of finance including overdrafts, government-backed schemes like Funding for Lending, and asset-based finance products such as factoring, invoice discounting and asset based lending. It turns out that, although almost all SMEs (98 per cent) are aware of overdrafts, just over a half (52 per cent) say they are aware of asset based lending.

Asset based lending is one form of finance particularly under-appreciated. This is despite the latest Q3 figures from the Asset Based Finance Association (ABFA), which showed a four per cent increase in the total number of businesses using asset based finance on the same quarter last year, to 43,500 firms.

The Lloyds survey shows that not just awareness, but also a lack of understanding of alternative forms of finance prevents many SMEs from using them. The vast majority of businesses claim a good understanding of business loans, and 73 per cent have used them. However, just 43 per cent of firms understood asset based lending.

Invoice finance, where a firm can borrow against the value of customer invoices, is one of the most popular forms of asset based finance, but again understanding of its benefits amongst SMEs is low. While over two thirds of firms are aware of invoice finance, just over half say they have a good understanding of it and only some 15 per cent have ever used it.

Hire purchase and leasing products, which can help SMEs fund new equipment or machinery purchases, had been used by over a third of respondents. Over two thirds of businesses say they have a good understanding of this form of finance.

Alternative forms of finance used to fund growth

Donald Kerr, managing director of Lloyds TSB Commercial Finance, said: “Access to finance is a key driver of economic recovery, and firms need to be aware of the options available to them, particularly those looking to invest and expand. As well as government backed schemes there are a range of other products and services available of which many businesses are unaware.”

Asked in what situation they would consider alternative forms of finance, the top three reasons cited by firms were to make corporate acquisitions, boost working capital, or invest in property – things asset based finance products like invoice discounting, factoring and asset based lending are known to be appropriate for. Asset based finance can provide business owners with the opportunity to borrow against the value of their assets, whether debtors or plant and machinery, providing them with the finance they need to grow.

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