The high street banks have often stood accused of neglecting small and medium-sized enterprises, and now more than ever before these companies are turning to alternative methods to fund their ambitious growth plans.
Asset-based lending was once considered to be a last resort and companies that used factoring and invoice discounting were often perceived to be in trouble.
But in recent years a highly sophisticated industry has sprung up with a range of financial solutions that are tailored to the specific requirements of SMEs. Asset-based finance also offers a real alternative to overdrafts and loans and, unlike venture capital funding, it allows people to hold on to their equity.
According to figures from the Asset Based Finance Association , more than £15bn was advanced to almost 50,000 UK companies by the industry during the third quarter of 2007 alone, a 15 per cent increase on the same period last year.
Alison Small, managing director at City Invoice Finance, says with clearing banks now scrutinising even medium-sized businesses, many SMEs are looking towards the more flexible independent invoice financiers for alternative methods of funding.
She said: "With the current credit crunch climate in full flow, bad debt protection is becoming more and more popular - providing crucial peace of mind in these uncertain times.
"The entrepreneurial spirit of the north west's community means that increasingly dynamic start-ups and larger businesses are looking to invoice financiers to provide creative solutions to their business needs."
As the invoice finance industry has started to mature, it has become increasingly competitive and the trend is moving towards putting together funding packages containing a range of finance services as opposed to a one size fits all model. Even corporate finance advisers have used invoice and asset-based lending to raise funds.
Gary Houghton, corporate finance partner at Baker Tilly in Manchester, said the popularity and influence of asset-based lending is set to increase during 2008.
He said: "The perception that traditional banks are tightening their belts could lead to further growth in asset-based lending, however there are more influential factors driving increased usage.
Flexible
"For example, businesses have become more aware of what it can achieve. Lenders too are more flexible in their approach - with many prepared to look beyond traditional funding structures.
"Providers are no longer simply looking at the value tied up in a company's outstanding invoices, but increasingly adding property, plant and machinery, stock and even cash flow to the mix."
Traditionally factoring and invoice discounting have been the most popular asset-based lending options. Factoring is a way of getting cash quickly by selling invoices to a factoring company without having to collect the debt. The factor company assumes the debt and collects the funds.
Invoice discounting is similar to factoring, however the relationship is undisclosed and the company collects the debt itself through its own credit control function, then passes the cash over to the invoice discounter. This kind of facility is widely used in manufacturing, wholesale, distribution, transport and printing.
Sean Powell, head of business development at RBS Invoice Finance in Manchester, says invoice finance provides businesses with a greater degree of flexibility and control since it allows them to immediately realise the cash benefit of their sales.
He said: "Cash flow is critical to the day-to-day operation of many businesses, particularly fast growing small and medium companies.
"Using invoice finance offers many advantages. It maximises the amount of cash available for ongoing working capital, preventing a business from being strapped for funds.
"Also the flexibility of the facility allows the availability of funding to grow in line with sales. This flexibility is an important tool for expanding companies as it allows them to utilise cash flow to support business growth."
Popular
David Smith, managing director of Manchester-based Positive Cash Flow Finance, added: "Invoice discounting is becoming increasingly popular as it provides instant working capital that is flexible and grows as companies' sales increase.
"A key benefit is that, unlike other measures, it is tailored to the particular assets that it is funding. This enables client companies to fund their growth without giving up valuable equity or having to pledge other assets on security."
In addition to factoring and invoice discounting, there are a huge range of flexible asset-based products on the market from bridging loans and operating leases to chattel mortgages and hire purchase agreements.
Christian Humphreys of SHM Smith Hodgkinson says there is a growing trend towards sale and leaseback. This allows capital, in the form of a percentage of the asset value, to be raised quickly against plant and machinery assets. Once the advance is repaid in full, the assets pass back to the company.
He said: "One of the biggest advantages of sale and leaseback is the ability to capitalise on a company's assets to gain fast access to capital for various purposes.
"Examples could include simply enhancing cash flow or even the purchase of new machinery to promote business growth.
"On occasions, the funder will look for additional security, over and above the fixed asset. This may be either by director personal guarantees or by other means."
Elsewhere, bridging loans are also proving extremely popular. Chris Baguley (pictured), managing director at Manchester-based Bridging Finance, says there has been an explosion in the demand for the loans for two key reasons.
He said: "Firstly, talk of economic uncertainty has made many business owners sit up and take stock of their current long-standing banking arrangements.
"Many realise that the rates and arrangements their bank offered them a couple of years ago simply aren't competitive anymore.
"To avoid being tied into another long-term agreement with their current lenders, many are turning to bridging finance to give them breathing space while they shop around for more competitive long-term options.
"Secondly, the economic climate has meant that some banks have become much more cautious with their lending. This is hampering the plans of the confident, robust and ambitious businesses out there that are keen to seize the many opportunities presented by the mere mention of recession.
"Property developers have always been more switched on to the benefits of short term finance but never more so than now in the current market conditions."
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