Monday 29th Oct 2018
Hitachi's quick guide to asset based lending and invoice finance
19 Jan 2017
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 business’s cash flow. They allow you to release cash quickly, avoid the need for lengthy or complicated contracts, and often benefit from very low interest rates due to the fact that the amount they let you borrow is tied directly to your business’s income or assets.
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.
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.
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.
Would I benefit from asset based financing?
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.
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. This article contains more information on invoice financing, including a comprehensive run-down of the different options on offer.