Asset-based finance (ABF) has a long history – dating back to the days of Babylon and ancient Rome when merchants sold goods on consignment. Today, the industry is a sophisticated transactional business funding model, which has probably never been more widely adopted across continents, many of which are experiencing strong growth. However, the emergence of FinTechs and new players with disruptive financing models is posing a challenge to traditional ABF lenders. To stay relevant and compete with this fresh wave of new competitors, the ABF sector needs to address a range of issues that will help it stay relevant and compete more effectively with new entrants to deliver the funding that growth businesses need.
ABF is growing fast
ABF has been growing strongly in both developed and developing markets. Figures from last year show the total global volume of asset-based lending and invoice factoring at US$3 trillion, an increase of 5 percent over 2017. Regionally, the pace of growth varies. Asia saw double-digit growth in 2018 driven by the rapid expansion of the Chinese economy. Meanwhile, established economies such as the U.S. and Europe have enjoyed consistent single-digit growth in recent years. Demand has intensified in the emerging economies of South and Central America as well as Africa. Argentina and Egypt saw the most notable advancement in ABF lending, recording increases of 34 percent and 24 percent respectively.
New entrants are disrupting the market
Since the end of the global financial crisis and the emergence of FinTech, which has rapidly driven competition between traditional and alternative finance providers, asset-based finance has faced greater challenges to remain competitive. FinTech has disrupted the financial services industry by democratising funding, making the application processes faster and more efficient while at the same time building products around the key principles of speed, relevance and transparency. As a result, funding provided by FinTech companies totalled $40.3B in 2018 from a standing start 10 years ago. The simple application process and speed with which SMBs are able to secure funding from FinTechs, such as UpStart and Funding Circle, has been a key reason for the sector’s strong growth.
The ABF sector has perhaps not been as fast as it could have been in responding to the challenge posed by new entrants. However, a number of factoring and invoice financing disruptors have more recently emerged and now have an established presence. Offering simplicity, speed, as well as flexible funding limits, firms such as FundBox and BlueVine have made invoice discount finance and asset-based lending more accessible for SMBs.
ABF sector needs to address key issues
Probably one of the biggest issues the ABF sector needs to address is raising awareness of its services. Disruptive finance lenders, such as P2P platforms, some of which now offer ABF, and crowdfunding have enjoyed significant growth in recent years – P2P lending is forecast to advance US$898B by 2024 and crowdfunding $89.72B by 2022, [4,5] dwarfing the profile of the more established asset-based finance. With such exciting growth these platforms have naturally captured the headlines.
Globally, ABF industry bodies such as the FCI should collaborate more with leading ABF finance providers to help raise the profile and articulate the benefits of factoring and invoice discounting as a credible solution for growth business funding. Working together, these key industry stakeholders could help to demonstrate that ABF providers have the technology, flexibility and products to match the best solutions on the market to help SMBs with their funding needs.
Re-focus required on true-growth businesses and broader asset range Another issue, which was discussed at our recent Growth Factors Conference in London, is the trend for ABF lenders to be more conservative, moving up the credit spectrum to target larger businesses. This is supported by data that shows while the value of loans has increased over the past ten years, the volume of transactions has fallen. For example, in Europe, according to research consultancy Round Window, some 62 percent of ABF advances go to large companies, with 22 percent to medium-sized businesses and only 17 percent to small businesses.
Clearly, ABF lenders need to re-connect with smaller business, but they could also benefit from broadening the range of assets on which they are prepared to lend. Given that many growth companies are service businesses, with a significant number in the tech arena, they lack some of the physical assets that traditional ABF lenders will accept. A recent report by the UK’s Corporate Finance Faculty, ‘Growth Through Asset-Based Finance,’ suggested that ABF lenders should consider more intangible assets, such as brands and IP as assets on which to lend.
Keep the process simple
Finally, ABF is seen as increasingly complex and time consuming, particularly for smaller businesses with limited resources. One area that potentially offers a solution is technology. ABF management software functionality and transaction streamlining has been transformed in recent years – the technology is now able to update collateral values as clients generate invoices in their day-to-day business, thus reducing the lead time between raising an invoice and receiving funding.
In an already competitive market, FinTech-style firms have in recent years considerably widened the range of funding options available to SMBs, introduced greater product diversity and brought far simpler models of funding for SMBs to market. Despite this, ABF lenders should still be able to thrive and prosper. The sector, by some margin, can advance a far greater quantum of funding to growth businesses than P2P platforms. The industry is becoming more aware of the issues it faces and is addressing them. And technology also offers ABF lenders opportunities to be more competitive in today’s SMB funding arena. While there are challenges, the outlook still looks bright for the ABF sector.