Can Asset Based Lending Help Finance Your Business? 16/10/2018

Asset-based lending

In Ireland, small and medium enterprises (SMEs) account for 99% of all businesses employing in excess of 65% of total persons engaged in employment. In the United Kingdom, there are in excess of 5.7 million SMEs, which is over 99% of all businesses with total employment of 16.1m, 60% of all private sector employment.

The need to enhance the role of SMEs as drivers of job creation, innovation and growth is essential to ensuring that the economy remains on track. This means addressing both cyclical constraints and structural barriers.

Access to finance continues to represent a significant barrier to entrepreneurship and SME growth, which was exacerbated by the global financial and economic crisis. Bank lending is still the most common source of external finance for SMEs.  However, due to prudential rules and credit conditions bank lending to SMEs has still not recovered to pre-crisis levels and evidence would suggest that credit restrictions for SMEs are likely to continue for some time.

As a result of this tightening of bank sourced finance, there has been a broadening in the range of alternative financing instruments available to SMEs, in order to address the diverse financing requirements of newer, innovative and fast-growing companies with a higher risk/reward profile.

One of the alternatives, which is most appropriate to the majority of SMEs is asset-based finance. Asset-based finance enables SMEs to release working capital on rapid and flexible terms.  Forms of asset-based finance include: – asset-based lending, invoice discounting/factoring, purchase order finance, trade finance/supply chain finance and leasing. Finance is raised against the value of the specific assets including accounts receivable, inventory, machinery, equipment and real estate and less on the SME’s own credit standing or balance sheet position.

Other sources of finance include alternative debt (e.g. corporate bonds), hybrid instruments (e.g. mezzanine finance) and equity finance (e.g. private equity, venture capital and business angel investing).

Access to instruments in the capital markets, such as corporate bonds is restricted to a small section of large SMEs. Corporate bonds require certain size, scale and an established credit history. As most SMEs do not meet these criteria, in the market they would attract a low rating and a very high coupon.

Hybrid instruments which can feature debt and equity may be relevant where a company is seeking a capital injection to fund growth opportunities, restructuring or strengthening its capital structure where it has no access to debt financing or equity.  However, it may not be well suited to many SMEs as it requires well-established and stable earnings and a recognised market position.

Equity finance is critical for SMEs that are looking for long term investment for growth and value creation.

While there are alternatives to traditional bank lending there are obstacles that may restrict the availability of some of these instruments either through size, scale, stability of earnings or market position. However, asset-based finance is widely available to SMEs to release working capital or obtain term loans, secured by the assets of the business.

As an asset-based financier we at White Oak IE play our part in providing trade/ supply chain finance to the SME sector. We provide purchase order funding solutions for assets in domestic and international markets to well established businesses allowing you to free up working capital to grow your business. White Oak IE’s import/export finance solution is based on competitive rates.

Arrange a call back here or call us now on +353 1 563 4130 or +44 1245 904 066.