Month: September 2014

Asset-Based Finance and SMEs

Can Asset-Based Finance Help SMEs Stay Afloat?

Having a steady cash flow is critical for any business and startups and smaller firms are certainly no exceptions. How can these companies prove that they are creditworthy? What if multiple financial institutions deny them loans? This is where other financial options can come into play, including asset-backed financing. The UK has taken it one step further and hopes to improve cash flow for SMEs.

The UK government announced on Aug. 6 that banks must forward SMEs’ unsuccessful loan applications to other potential finance providers, including asset-based financiers. According to the Asset-Based Finance Association (ABFA)–the body that represents the asset-based finance industry in the UK and the Republic of Ireland–the move could be huge for small business funding in the UK.

By referring SMEs to platforms that will connect them with other finance providers, more businesses could be enabled to find the funding they need, according to the ABFA. The organization said that 40 percent of businesses give up on finding funding after being turned down by their banks.

“Asset-based finance is a key part of the tool-kit available to assist the cashflow of UK and Irish businesses,” ABFA Chief Executive Jeff Longhurst said. “It’s great to see the government acknowledge that the industry is already making an enormous contribution to funding the economic recovery and can make an even greater contribution in the future.”

Longhurst added that the ABFA hopes that the news measures “will begin to close the knowledge gap that is preventing small businesses from accessing the funding ABFA members can provide.”

According to Longhurst, ABFA members have been providing finance to SMEs for more than 50 years and currently fund more than 43,000 businesses with a combined turnover of £68 billion. The industry is still willing and able, however, to support more companies.

The value of business funding provided by ABFA members has risen to £17.5 billion–29 percent–since the peak of the recession in 2009. More traditional types of lending have fallen by 19 percent over the same period, the ABFA reported.

America’s attempt at helping SMBs

The United States is also working to help smaller firms acquire the proper funds. According to the New England regional administrator of the U.S. Small Business Administration (SBA), Seth Goodall, the SBA is changing its guarantee process in an effort to help small companies.

Specifically, the SBA is streamlining its underwriting by making a total credit scoring model it’s been testing and refining for more than a decade available to all of the organization’s lending partners on loans of no more than $350,000.

“The SBA total credit score combines an entrepreneur’s personal and business credit scores and makes it easier and less time-intensive for banks to do business with the SBA,” Goodall wrote in a recent New Hampshire Business Review post. “This model is cost-reducing and credit-based. It ensures that risk characteristics – not socioeconomic factors – determine who is deemed creditworthy. “Along with this simplification, we’re eliminating requirements for time-consuming analyses of a company’s cash flow on small loans under $350,000, a step that can delay loan decisions.”

Additionally, Goodall explained that at the beginning of the fiscal year in October, the SBA set fees to zero on loans of $150,000 or less, which it sees as another way to reduce the costs for lenders of making small-dollar loans.

“We know that the key to a strong and lasting middle class is opportunity for all,” Goodall wrote. “The president has made clear that we must grow our economy from the middle out. Key to that is access to the American dream of starting and owning your own business. By making SBA loans easier and more affordable, more lenders will join our program, more small businesses will have access to our lending products and more entrepreneurs will succeed.”

Asset Finance Can Help Your Business

Asset Finance helping your business

For small businesses, cash flow concerns can arise unexpectedly to take a significant toll on day-to-day operations and your plans to build for the future.

In order to offset these issues and keep their company ticking along, many business managers are turning to asset-based finance as a solution to their short-term cash flow problems.

What does asset-based financing involve?

Asset financing is a process through which a company uses its own assets to gain access to funding that would otherwise be unavailable to it, usually owing to poor or mediocre credit ratings.

A company might decide to sell some of its assets in order to raise the short-term finance they need or they may use their assets as collateral to access secured loans that might ease cash flow concerns or help them make other important investments.

If you’re a business boss considering what assets you might have to sell or to leverage as part of a credit arrangement, you may think immediately of physical equipment or property assets. However, accounts receivable and invoices issued to reputable customers are assets too and they can be used to generate a cash advance via invoice factoring or to secure a loan through invoice discounting.

A useful option

Asset financing, whether it involves your company’s property, inventory or outstanding invoices, can give small businesses the lifeline of access to cash or credit in the short term. In an ideal world, there would be no need for a business to use their assets to raise finance but as a means of weathering a financial storm, the option can often prove absolutely invaluable.

The reality for many small businesses is that their applications for loans are often turned down routinely and the legacy of financial difficulties can linger long after the biggest obstacles have been overcome. Asset-based financing can be a great help to companies that have established strong operational foundations but run into short-term difficulties that need immediate resolution.

Avoiding worst-case scenarios

Asset-based finance is also particularly useful and important for businesses that are struggling to keep up with their bills and are facing the prospect of becoming insolvent. When creditors are clamouring for payment and it is impinging on your ability to function smoothly or at all then asset-financing options can become appealing and practical solutions.

What you need to know

Asset-based financing isn’t right for every business and there are issues that company bosses should be aware of before entering into such an agreement. First of all, when you establish a line of credit with your assets as collateral then you run the risk of losing them under circumstances in which you are unable to pay back any interest accrued.

With invoice factoring, you are only obliged to pay the interest on amounts borrowed via the lines of credit secured. Taking on debts in this fashion should always be considered carefully but, when used appropriately, using your invoices as assets in a financing arrangement can afford very valuable and even vital flexibility to small businesses in any sector.

Interest rates rise within a year?

Bank of England poll shows 49% of households expect an interest rates rise in the next 12 months

Half of all Britons expect interest rates to rise over the next 12 months, according to a Bank of England survey.

The Bank’s quarterly poll showed 49pc of people expected policymakers to begin increasing rates from a record low of 0.5pc within a year, up from 42pc in May.

This is the highest proportion since May 2011, when the economy was showing signs of recovery and three policymakers were voting to raise rates to keep a lid on inflation.

The survey showed 43pc of respondents expected rates to rise “a little” over the next 12 months, while 6pc believed they would go up sharply. Just 4pc of respondents expected rates to fall.

The poll of 2,000 people was conducted between August 7th and 15th, meaning some respondents would have seen the Bank’s latest Inflation Report, which was published on August 13 and showed the economy remained strong, despite weak wage growth.

However, the answers were collected before minutes of the Bank’s August interest rate meeting were published, which revealed that two rate setters – Martin Weale and Ian McCafferty – voted for a 0.25 percentage point increase to 0.75pc.

Mr Weale voted for a rates to rise between January and July 2011, when the economy was picking up and inflation was close to hitting 5pc. He was joined by Andrew Sentance, a former external member of the MPC and Spencer Dale, ex-chief economist.

The survey also showed inflation expectations were creeping up. Households believe prices will rise by 2.8pc over the coming year, compared with 2.6pc three months ago and the current inflation rate of 1.6pc.

For the next two years, inflation expectations, as measured by the Consumer Prices Index (CPI) rose to 2.8pc from 2.5pc in May, while inflation expectations five years from now rose to 3.4pc from 2.9pc in May.

A fifth of respondents said higher interest rates would be best for the economy, unchanged from May, while more than a third said rates should stay where they are.


UK Manufacturing Growth

Shock drop in UK manufacturing growth – are the finest days of UK recovery over?

A weaker outlook for the manufacturing sector has led some analysts to suggest that the best days of the UK recovery have now passed

Poor manufacturing data could signal the end of a hot streak for UK growth. Surveys of the nation’s manufacturing sector saw an unexpected fall this August, as purchasing managers’ index (PMI) figures dropped from 54.8 to 52.5. While still above 50 – suggesting that the sector continues to expand – the data pointed to a fall in the pace of growth.

“While the worst days of the recession are definitely behind us”, said Jeremy Cook, of currency firm World First, “PMI surveys also suggests that the finest days of the recovery are too.”

The survey pointed to a “broad slowdown” that is underway in the UK’s manufacturing sector, according to Markit, who compiled the report.

Manufacturers “were walking rather than running in August as the sector’s performance fell to a 14-month low”, said David Noble, of the Chartered Institute of Purchasing & Supply.

Rob Dobson, senior economist at Markit, said: “It is also becoming increasingly evident that UK industry is not immune to the impacts of rising geopolitical and global market uncertainty, especially when they affect economic growth and business confidence in our largest trading partner the eurozone.”

He expects manufacturing will “provide a lesser contribution to the UK economic growth story in the third quarter than at the start of the year”.

Sterling gave back gains against the dollar and euro on Monday after the data, falling to $1.6627 from $1.6645 beforehand the release.

Downward revisions to July’s data also painted a weaker picture of the sector’s strength.

July’s headline PMI reading was revised down from 55.4 to 54.8.

Paul Hollingsworth, UK economist at Capital Economics, highlighted subcomponents of August’s survey which suggested that “the meagre 0.2pc rise in the official measure of manufacturing output may be repeated in the third quarter”.

Yet even if the manufacturing sector has lost some steam, “growth should remain robust over 2014 as a whole”, said Mr Hollingsworth.