Asset-based funding simply means using machinery, property, and invoices as collateral to gain finance – usually a short-term finance option. We caught up with some experts to learn more.
As we have explored previously in this series, there are different kinds of finance for different kinds of projects.
For example, if you an individual is crowdfunding, they are likely to be launching a new project or business. However, is someone is seeking cash flow finance of some description, they are more likely looking for short-term finance solutions to an existing problem.
Regardless of whether a business is seeking finance as a necessity to keep afloat, or for an exciting large-scale project, all finance forms can be useful on a scaling up journey.
Asset finance is one particular kind of short-term finance, but the description is rather broad. Essentially, a business may use any of its assets as collateral on a loan, which can include inventory, equipment, buildings and warehouses, and even invoices – this is referred to specifically as invoice financing.
We caught up with two asset finance experts, John Bevan, managing director at Secure Trust Bank Commercial Finance, and Richard Spielbichler, ABL director at North West, Independent Growth Finance (IGF). Here’s what they had to say.
Why is it so important for small business owners to manage their cash flow effectively?
John Bevan: “It is essential that businesses maintain a positive cash flow. In certain circumstances, finances can be drained due to unpaid invoices, which can lead to bad debt and insufficient funds to support expansion.
“Asset-based lending is a viable option when seeking short-term finance. If a company is feeling the pressure from outstanding invoices and cannot acquire the stock it needs due to cash flow restrictions, it can boost working capital.”
Why might a business get turned down for a bank loan, and what happens next?
Richard Spielbichler: “Each case is assessed on its own merits, but often banks and other traditional lenders have a strict set of criteria which must be met in order to be eligible for a loan. Many SMEs’ business plans do not fit into the ‘box’ provided. Anything from a bad credit rating to unusual collateral can leave a business without bank financing.
“At IGF, we are usually introduced to a business through an intermediary, such as an accountant or financial advisor. The bank referral scheme has meant that businesses refused bank funding can be directed to one of three large alternative lenders chosen by the government, but often the financing solutions available by these larger lenders still do not best fit the needs of SMEs.”
What is the actual process for applying for asset finance?
RS: “One of our main focuses is meeting our customers’ needs, so the first step for us is a face-to-face meeting to establish the business’ finance requirements and long-term aims. Once this information is ascertained, we then conduct an on-site audit to ensure that a business can manage the ongoing facility and conduct a credit checks before issuing an offer to the prospective customer.
“Once the offer is accepted and documents are signed, a date is arranged for the business to receive the funding. The process overall typically takes between one and four weeks to complete, depending on the complexities within the prospective business.”
JB: “We aim to make this as seamless as possible and can match most companies’ requirements and expectations. Once we have taken the time to understand a company from meeting and information provided, we can be in a position to make a formal offer within 24 hours if required and, subject to security being completed, provide funding within two days.”
What are the advantages of alternative finance investment over a bank loan?
JB: “Alternative finance presents many advantages to smaller businesses. The flexibility of an asset-based lending facility allows companies to lend against existing machinery and stock and acquire additional funding as it grows.
“Due to its bespoke nature, the providers will take more time to understand the business and create a facility that suits their needs, whilst also creating a long-standing arrangement by supporting the company throughout the life of the facility.”
RS: “Typically, an independent financier will take time to really get to know their client and treat them as an individual. Businesses ultimately need a finance partner which understands their business, and can react quickly when needed. An additional benefit comes in the more personal, tailored service – alternative finance firms often have dedicated client managers available whenever needed.”
What help and advice is available to small businesses in need of finance and don’t know where to seek it?
JB: “There are many organisations that will offer impartial advice to SMEs that are seeking finance. The Federation of Small Businesses and growth hubs run access to finance programmes, which will detail the different types of finance available and which will be the best solution for their needs.
“These are hugely popular within the SME community, as they will break down the often-complicated forms of finance and explain them in a way that business owners can understand.”