The recent annual report by the British Business Bank on Small Business Finance Markets revealed that asset finance for small and medium-sized businesses (SMEs) grew by 3% during the period 2018/2019.
Indeed, in 2017 alone some £32 billion was advanced to British businesses in the form of asset finance.
But what exactly is asset finance?
The Merchant Advice Service explains that asset finance allows a business to borrow funds against the value of assets it already owns. The repayment of that borrowing may be spread over several years – so bringing within the company’s grasp otherwise unaffordable equipment, to raise needed working capital or to smooth over temporary cashflow problems.
One of the most valuable assets held by any company, large or small, are its invoices receivable from creditors for goods and services supplied. That asset may be used to raise invoice finance.
Invoice finance relies on the value of those invoices receivable by effectively selling them to a third party and repaying the sum advanced by way of that sale as and when the invoices are paid.
Invoice finance, in turn, may come in two different forms:
- the finance provider advances an agreed percentage of the value of your invoices receivable – up to 90% of their value in some cases;
- you remain responsible for the collection of outstanding invoices and repay the lender – together with interest (in this case called a “discount charge”) as you bank the receipts each month;
- in this form of invoice finance, the provider is called a “factor”;
- the factor not only advances a percentage of the value of your invoices receivable but also assumes the task of collecting them from your creditors;
- once the factor has received payment of those invoices, he will deduct repayment of your advance, plus the costs of the service provided, before returning to you the balance of payments received.
It may be seen that invoice financing is a form of borrowing – using the asset represented by your invoices receivable as security against the loan.
Unlike business loans, however, invoice finance is a more flexible way of borrowing. Repayments of the advance are made as and when payment of the invoices is collected. Repayment is directly proportional to the success of your business in terms of the invoices raised and paid.
Invoice finance – like any other type of borrowing – comes at a cost, of course. It is not regulated by the Financial Conduct Authority (FCA), but the Asset Based Finance Association (ABFA) – now incorporated into UK Finance – maintains an industry-wide code of conduct. By choosing one of its registered members, therefore, you may be re-assured of reasonable costs.
These might comprise:
- a service charge – which covers the provider’s administration, management, and invoice collection costs and are typically charged as a percentage of the turnover of your business (generally, at a rate of between 0.75% and 2.5%); and
- a discount charge – is a fee proportional to the sum you draw down against your invoices receivable. It is typically calculated daily and is applied immediately after the money is advanced – currently at a rate of between 1% and 3% over the Bank of England base rate.
Given its flexibility and the reasonable costs involved, invoice finance proves a widely popular method for businesses to raise the funding needed for all manner of operations.
Considering Invoice finance? Speak to Nick at Peak Business Finance