Asset-based lending (ABL) – an alternative to traditional business loans where money is borrowed against the value of the company – has become more popular amongst big businesses in the past few years as more and more corporations reported challenges in securing commercial finance due to unpredictable economic recovery. In 2014, ABL was up 16 percent on the previous year, and was most notable amongst companies with revenues greater than £100m as they had more resources to borrow against.
However, for the first time we’re beginning to see more and more small businesses jumping on the Asset-based lending bandwagon, and, as a result, the nature of asset-based lending is beginning to change. Traditionally, ABL was a form of business funding that was used for short-term boosts or to ‘bridge the gap’ – to ride through financially tough periods. Today, SMEs are viewing ABL in much the same way they view small business loans – for vital growth and development within their industries.
Advantages of Asset-Based Lending
For small businesses, the primary advantage of asset-based lending is access to financing that can help them grow and develop. ‘The speed at which asset-based finance facilities can be agreed or extended makes them an ideal way for businesses to respond quickly to growth opportunities as they arise’, says Jeff Longhurst of the Asset-Based Finance Association (ABFA). Depending upon the type of business, some SMEs could be able to borrow 90 percent of their unpaid invoices, as well as borrow against total value, business premises, and equipment.
A further advantage for SMEs is that asset-based lending typically comes with very competitive rates, which in some cases can make it a much more attractive option than standard small business loans. Typically, businesses will pay rates roughly the same – or even slightly lower – than they would with a standard business loan, making this a very attractive option for SMEs working to a tight budget.
Who’s Offering Asset-Based Lending?
By using a price comparison tool to explore the different financial products offered by banks in the UK, businesses can easily identify providers that are branching into asset-based lending. One of the very first high street banks in the country to extend into this sector was Lloyds, who created an asset-based lending arm in response to research suggesting that 62 percent of businesses who had previously used ABL plan to do so again to unlock their true value through their assets.
There’s good news for small and medium businesses – approval of small business loans is continuing to rise, and is showing significant improvements year on year. During the first quarter of 2015, 60 percent of applications for business loans were approved by UK banks, compared to just 45 percent during the first quarter of 2014. Statistics show that the amount lent to small companies is also increasing, with £1.8 billion offered to small businesses during quarter 1, and £4.5 billion to medium sized businesses, according to a report by the BBA.
Banks Focusing More on Business Loans
The fact that banks are beginning to once again look seriously at small business lending is a good indicator of economic growth and development as the nation continues to recover from the effects of the recession. While the availability of commercial finance for small businesses – and the associated fees – may not be the most lucrative for borrowers, many banks are reporting healthier profits and are demonstrating greater confidence in the economy by once again offering lending to emerging SMEs. We’re also seeing a trend for banks to introduce new products and lending terms for businesses, including asset-based lending that’s tipped to be the ‘next big thing’ for SMEs.
Business Loan Tips for SMEs
While there’s no way to 100 percent guarantee a business loan approval, there are measures that SMEs can take during the application process that can make an approval more likely.
- Compare Lenders
By using online price comparison tools, businesses can identify banks that offer dedicated small business loans for SMEs, rather than financing designed for larger corporations. Many banks are introducing these financial products as a way of helping small businesses develop within their industry.
- Collate Business Data
It’s important to remember that the economy is still very fragile and unpredictable, which is leaving some banks a little wary of small business lending. Banks may be more likely to approve business loans to SMEs that can display accurate financial records showing an ability to meet the agreed repayment terms.
- Have a Plan
Banks that offer small business loans specifically designed to assist SMEs often want to understand more about how the money will be used to boost business and ultimately strengthen the economy. Having a plan outlining how the financing will be used internally to help a small business develop may be beneficial.