Asset based finance such as invoice discounting is increasingly taking market share from bank overdrafts as a key source of funding for small and medium sized enterprises.

In factoring or invoice discounting arrangements, advances are made against the value of invoices, typically 80% to 90% of their value. While this is not the cheapest way of raising finance, it can be helpful for rapidly growing companies because the security will allow higher borrowings in line with their expansion.

Despite some negative views around this form of financing, and concerns about a company’s credit risk, asset based finance actually gives businesses greater certainty about their financial position, by developing on-going relationships with asset finance providers. These relationships are based on a deep understanding of their current financial position and prospects.

Unlike bank overdrafts, that can be withdrawn at short notice if companies are deemed no longer to need them, asset based finance is a longer-term option, making it easier for companies to plan.

According to the Asset Based Finance Association (ABFA), at any one time, an average £9.5 billion was lent to small and mid-sized businesses in asset based finance in 2016 – up 3% from £9.2 billion in 2015. At the same time, the total amount of outstanding bank overdrafts fell by 2% to an average £12.4 billion last year, down from £12.6 billion in 2015.

As banks continue to be constrained in their traditional lending, smaller businesses are increasingly seeing asset based finance as a suitable way to unlock the value of a range of business assets to enable growth investment and free up working capital.

To help them get the best deal, SMEs are turning to funding companies such as Pegasus Funding Resources, which offers a free service that matches an appropriate invoice discounter to an SME. Each discounter is selected from a panel of 44 factors and discounters.

Pegasus chooses the best fit and obtains indicative quotations from four or five organisations. It then selects the best three to introduce to a client.

Invoice finance – lending secured against the value of unpaid invoices – is one of the most widely used forms of asset based finance (ABF). ABF also includes lending against inventory and plant and machinery as well as intangibles such as brand value and forward income streams.

Jeff Longhurst, chief executive of the ABFA, said:

“More and more SMEs are replacing traditional overdrafts with asset based finance – it is now a major part of the small business lending space.

“SMEs are realising they can leverage the value of assets such as outstanding invoices for the direct benefit of their businesses – and there are several flexible options they can choose from.

“For example, within invoice finance they can either go for an invoice discounting facility where they manage their own credit control, or they may prefer invoice factoring, where the lender takes on the credit control and collections process on their behalf. The latter is often particularly attractive for smaller businesses with fewer internal resources.

“Unlocking this capital gives SMEs the means to purchase new equipment, invest in new systems or expand premises and increase headcount to ramp up capacity and capitalise on new growth opportunities.”

So the message is clear; think broadly and intelligently about the right funding option for your business. The right solution may not always be the one you first think of.

If you are interested in obtaining funding through asset based finance, let Pegasus Funding do the work for you.