By Daniel Hunter
A lack of understanding of alternative forms of borrowing, such as asset based finance, could be hampering UK small to medium sized business (SME) growth, according to new research.
In a survey of 2,000 SMEs, Lloyds TSB Commercial Finance questioned firms about their understanding and awareness of a range of sources of finance including overdrafts, Government-backed schemes like Funding for Lending and asset based finance products such as factoring, invoice discounting and asset based lending.
The latest Q3 figures from the Asset Based Finance Association (ABFA) show a 4% increase in the total number of businesses using asset based finance on the same quarter last year, to 43,500 firms.
However, research from Lloyds TSB Commercial Finance shows that there is still a lack of understanding of asset based finance, compared to more traditional forms of borrowing such as overdrafts, loans and mortgages. Almost all SMEs (98%) are aware of overdrafts, but just over a half (52%) say they are aware of asset based lending.
The survey also shows that a lack of understanding of alternative forms of finance prevents many SMEs from using them. The vast majority (98%) of businesses claim a good understanding of business loans, and 73% have used them. However, just 43% of firms understood asset based lending, and only 19% of them had ever used this source of finance.
Invoice finance, where a firm can borrow against the value of customer invoices, is one of the most popular forms of asset based finance, but again understanding of its benefits amongst SMEs is low. While over two thirds (70%) of firms are aware of invoice finance, just over half (54%) say they have a good understanding of it and only 15% have ever used it.
Some alternative products are better understood by businesses however. Hire purchase and leasing products can help SMEs fund new equipment or machinery purchases. Over two thirds of businesses (69%) say they have a good understanding of this form of finance, and over a third 36% have used it.
Asked in what situation they would consider alternative forms of finance, the top three reasons cited by firms were to make corporate acquisitions, boost working capital, or invest in property - illustrating the importance of asset based finance products like invoice discounting, factoring and asset based lending to growing businesses.
“Access to finance is a key driver of economic recovery, and firms need to be aware of the options available to them, particularly those looking to invest and expand. As well as government backed schemes there are a range of other products and services available of which many businesses are unaware," Donald Kerr, managing director, Lloyds TSB Commercial Finance, said.
“Firms are more likely to seek out alternative forms of finance if they want to grow, for example by investing in property, or to fund a corporate acquisition.
"However, some also recognise its usefulness in managing working capital. Asset based finance can provide business owners with the opportunity to borrow against the value of their assets, whether debtors or plant and machinery, providing them with the finance they need to grow.”
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