What is asset financing?
Asset-based finance is a sector where money is borrowed against the assets that a company has. This may be the property they own or the outstanding money owed to businesses by their customers.
In the UK one of the most popular forms of asset-based finance is through in-voice finance. This is a short-term solution to cash-flow problems in which companies who have debts owed to them can use these debts to borrow.
Finance companies will agree to pay a percentage of the debts (generally 80 per cent – 85 per cent) of the debts on the agreement that they are given the balance, less charges, once the customers do pay.
This allows companies to keep up with business growth without giving away any of their company equity or control.
Why and when should it be used?
Jeff Longhurst, CEO of the Asset Based Finance Association (ABFA), which represents the majority of the invoice finance and asset based lending industry in the UK and Ireland, says: “Asset-based finance is a working capital solution purely for businesses that have working capital traditionally and its nearest rival I suppose is the overdraft. The reasons it is more effective than overdraft is that because we analyse the risks against the debtors and the invoices to closely we’re able to negotiate better conditions than you would get on an overdraft.”
“It allows the business supplier to get the best capital for the best rates to enable them to trade most effectively… If you have equity on one side and things like leasing and loans on the other then in terms of working-based capital the best method is to use alternative finance.”
In tomorrow’s instalment of the alternative finance series, we look at venture capital and private equity…