Asset based lending and invoice finance: a quick guide

Friday 7th January 2022

Most businesses need a little additional funding at some point - to buy in new stock before the previous round of invoices has cleared, to fund expansion, or because they’re keen to increase their chances of negotiating better supplier discounts by ensuring that they have a steady stream of ready cash to spend.

Asset based lending and invoice finance are two of the most common options when it comes to raising extra funds, and are a very popular way of improving a businesses cash flow.

These facilities typically allow businesses to:

  • release cash quickly (often in as little as 24-48 hours)
  • obtain funds without the need for lengthy or complicated contracts
  • maintain good cash flow on a month-to-month basis

Understanding the ins and outs of these options can be complicated though, which is why we’ve put together this brief guide, providing an overview of both and giving you some insight into the pros and cons that are usually associated with asset based financing.

In this article:

  • What is asset based lending?
  • Businesses best suited to asset based lending
  • What is invoice finance?
  • Types of invoice finance
  • Businesses best suited to invoice finance

What is Asset Based Lending?

To kick things off, we’re going to start by looking at asset based lending. This is a generic term for any loan that’s secured against assets your business already owns. Using these asset-secured structures usually involves offering up stock, plant, property or machinery as collateral that can be recovered in the event of a default. Some asset-based loans can also be taken out against intangible assets like intellectual property or predicted forward income streams too, although this is rarer.

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Businesses best suited to asset based lending

If you’re looking to fund rapid expansion, need to improve cash flow, or consistently find that you are unable to make the best possible purchasing decisions due to the amount of unpaid invoices on your books, asset based financing of some description will be a good fit for your business. As mentioned above, loans backed by pre-existing assets normally benefit from very low interest rates, and are very simple to manage.

Traditionally, asset based lending has been more popular with medium to large enterprises but is now becoming more and more popular amongst a great many SMEs now though, and may well be worth considering if you have a large amount of stock, property or machinery that you’re willing to put up as collateral.

What is Invoice Finance?

Invoice finance is a specific type of asset based lending, which allows you to borrow money against the value of unpaid invoices. In basic terms, a lender allows you to loan an amount equal to a percentage of your unpaid invoices, before they have been settled by your clients and/or customers. In return, you agree to repay the amount in full once the invoices have been settled, plus a small fee for the use of this facility.

In some cases, the lender allows you to collect the invoices as usual and the agreement remains confidential, this is referred to as invoice discounting. Alternatively, you can outsource your credit control to us leaving it in the hands of professional experts who have many years experience of getting good results. This is referred to as invoice factoring.

Types of invoice finance

If you’re interested in invoice financing, you should know that the size of your business will determine the type of funding that’s made available to you.

1. Invoice discounting

Invoice discounting can only be offered to businesses that have their own, in-house credit control department. Discounting agreements also require more trust on the part of your factor, and they’re normally only offered to larger businesses with a stable client base.

2. Invoice factoring

Factoring agreements remove the need for in-house credit control staff, which is one of the reasons that they’re normally offered to SMEs. Factoring agreements also effectively outsource the management of your sales ledger, which means you’ll have much more time to invest in growing your business. The downside is that you won’t be able to control every aspect of client-side communications, but the benefits often outweigh the costs, and it’s worth noting that the focus on freeing up your time is one of the reasons that invoice factoring is so popular amongst businesses in the early stages of the growth cycle.

Businesses best suited to invoice finance

Invoice financing is best suited to small/medium sized businesses, and is a good option if you are looking to unlock unrealised potential. It’s also well-suited to businesses that suffer due to the long wait-time before invoices are settled, and is often used by businesses in the early stages of growth. There are some potential downsides to consider though - particularly if you are looking into factoring, which offers very little in the way of confidentiality, if this is the case you need to consider Invoice Discounting.

Get in touch to find out how invoice finance can help boost your businesses cash flow

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