By Francesca James
UK Small and medium enterprises (SMEs) are failing to take advantage of available funding despite a significant lending gap, which the Centre for Economics and Business Research (Cebr) estimates at £28 billion, states a report released today by Centric Commercial Finance.
The report demonstrates that asset-based lending (ABL) including invoice discounting could lead to an increase between £531.6 million and £1.4 billion to the UK’s GDP by the end of 2012 by funding SME investment.
The report suggests as many as 650,000 UK firms are in sectors that can be considered suitable for commercial finance, a term that covers ABL including invoice discounting.
This type of finance allows companies to draw money against assets such as trade receivables, stock and machinery. The 650,000 firms account for an estimated £8.8 billion of the UK’s SME lending gap. However, the trade body for the ABL sector, the Asset Based Finance Association (ABFA) states that its members are servicing a small fraction of potential clients — just over 41,000 SMEs (including factoring).
John Onslow, CEO and co-founder of Centric, commented, “The last Credit Conditions Survey from the Bank of England showed an enormous disparity between the demand for funding from small enterprises in particular, and what level of finance is realistically available to them.* Our report shows a significant chunk of the SME population has not yet opted to use ABL, which might be suitable and could improve their situation if this option is explored.”
While the banks have refused or withdrawn funding since the start of the financial crisis, more SMEs have been using ABL including invoice discounting. The total amount of money advanced to SMEs against trade receivables in the form of invoice finance has nearly doubled since 2000. In the last five years funding advanced against assets has increased to £15.8 billion — an increase of 22.2 per cent.
John Onslow continued, “We recently took on a tractor tyre manufacturer that lost its bank’s funding due to it being reclassified as an automotive supplier — a sector that the bank had decided was a credit risk. After a seven year relationship, the business was simply dismissed. This ‘template’ approach just doesn’t make sense to us and it leaves many clients completely bewildered. ABL is well placed to respond to greater demand from SMEs and while the banks remain cautious, our industry will continue to do so.”
Managing economist, Charles Davis, at the Cebr added, “If ABL is going to fill the gap, more SMEs need to understand how this form or finance works and why it is a viable option. Awareness is a barrier but our research clearly shows that alternative forms of finance have an important role to play in the economy. SMEs account for 51 per cent of the UK’s economic output and 59 per cent of employment in the private sector — their financing needs are crucial to the UK’s economic recovery.”
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