Need for Cash Drives Asset Based Finance Expansion; Stephen Maskell, Head of Banking and Finance at Else Commercial Solicitors, Explains Why Asset Based Lending Is Proving Increasingly Attractive
Byline: Stephen Maskell
2 008 was a landmark year for the asset-based finance industry and 2009 is likely to follow suit.
Asset based lending is growing far faster than traditional lending.
Not surprising perhaps given the credit crunch, the banking collapse and the recession.
Banks, despite government entreaties, stand accused of remaining very cautious; meanwhile hard-pressed companies are ever more conscious of the importance of cash flow.
The old motto that 'cash is king' has never been more relevant.
Hence the asset based finance industry continues to expand notwithstanding the downturn in the economy.
There are two main arms to the sector, both allowing companies to release liquidity tied up in assets.
With invoice discounting, an institution typically meets 90-95 per cent of a customer invoice and, once the client concerned pays in full and the funds have cleared, hands over the rest, minus an agreed fee. It is up to the company to secure payment from the customer.
In the case of factoring a business sells its invoices to a third party at a discount in exchange for immediate money with which to finance continued operations.
It is then down to the factor to pursue the balance.
And while the former thrives, the latter is proving less popular..
Indeed there has been an on-going decline in the annualised growth of factoring since June 2008; off around seven per cent.
This is thought to be because firms that take it up are smaller, and larger numbers of them are failing. Export factoring also dipped marginally in the fourth quarter of 2008. In contrast, invoice discounting is usually used by medium-sized and larger firms that have good back-office arrangements.
Overall though asset-based finance continues to be a success story.
And in our view, on the basis of advising clients active in the sector, it will remain so.
The industry is now worth more than pounds 208 million, up nine per cent on last year's figures.
By the end of 2008 it had advanced in excess of pounds 17 billion to UK business against invoices, stock, property and other trading assets worth pounds 31.5 billion.
The vast majority of advances (pounds 16 billion) involved invoices but those made against other assets grew at a faster rate - 54. …