Growth through asset based finance

Asset based finance (ABF) has increasingly been used as a source of funding by high growth companies in recent years – from small businesses, to those owned by private equity, to innovative businesses and subsidiaries of some of the world’s largest companies.

The finance sector is committed to further improving awareness and accessibility of this form of funding, but many members will still think of asset based finance as ’lending of last resort’. However times are changing, and for many companies asset based lending works well, which is why ICAEW’s Corporate Finance faculty has partnered with the Asset Based Finance Association (ABFA) to produce a best-practice guideline to growth through ABF. The guidance provides a thorough and up-to-date understanding of ABF which I hope will be useful to members involved in finance and company funding.

What is asset based finance?

For those who are not familiar with ABF, it is a collective term for various types of business funding which are secured against specific assets of the company. It has recently played a prominent role in M&A where it is being used to fund transactions, help fund management buyouts or fund the growth of a business to put it in a position to make acquisitions.

There are three broad types – factoring, invoice discounting and asset based lending (ABL) – all of which are increasingly competing with other types of ‘conventional’ bank finance, such as loans and overdraft. In fact, members of the ABFA had security against ABF facilities of £43.7bn at the end of last year – a huge number for the industry.

A key driver for this growth can be the flexibility that ABF offers to companies. As a business’ sales grow, so its need for working capital will increase. But as the value of invoicing grows, so too will the availability of working capital from an ABF facility, be it via factoring, invoice discounting or a wider package of ABL. When it’s working effectively, it frees up management to concentrate on operations, driving strategy and growth.

The recent growth of ABF has also been driven by an upturn in our members’ willingness to recommend investment in capital equipment. Some are seeking to ensure their business is able to continue to operate with the potential shortage of labour that we may see as a result of Brexit, or to remain competitive in the face of further advances in technology. Given this context, the use of ABF is likely to continue to increase over the coming years. My hope is that our report will provide guidance to members and businesses who are considering turning to this form of funding.

You can access the report here.