Asset-based Finance: Helping Prevent a UK Triple-dip Recession

It seems that UK chancellor George Osborne has just got away with steering the UK’s economy through choppy waters and away from the riptide of a potential triple-dip recession. Data this month from the National Institute of Economic and Social Research (NIESR) indicated that Britain’s economy grew by 0.1% in the first quarter of 2013 – although UK growth figures due imminently from the Office for National Statistics (ONS) might not necessarily support this estimate. With the UK economy shrinking again towards the end of last year, another contraction in early 2013 – which while still possible is unlikely – would result in the country’s third official recession in less than five years.

Helping underpin the struggling UK economy is the asset-based finance industry, which has continued to deliver positive growth for each of the past three years despite the poor UK gross domestic product (GDP) figures. The latest quarterly statistics from the Asset Based Finance Association (ABFA) for Q412 are significantly more upbeat, showing that firms which use invoice finance enjoyed a surge in sales during the quarter and grew by nearly 13% from Q312. This was the highest quarterly growth rate in client performance since the start of 2009. The combined annual turnover of UK companies using invoice finance in 2012 stood at more than £250bn.

Domestic invoice discounting – as opposed to factoring and asset-based lending – largely drove this sales growth by increasing 16% in Q412 from Q411. The surge in demand for invoice discounting is increasingly being driven by small and medium-sized enterprises (SMEs), seeking to unlock the value of their invoices, which represent their single biggest asset.

At a time when overall UK net lending contracted by 2.6% during 2012 versus 2011, total funding advanced to clients by the ABFA’s members stood at £16.7bn at the close of last year, an increase of 6% from the balance at the end of 2011. This growth shows a continued demand for working capital from Britain’s SME community and that firms are increasingly seeing the benefit of asset-based finance over other forms of funding.

Demand from Manufacturers

The ABFA’s figures show that 83% of UK firms using asset-based finance are classed as small, with annual turnover of no more than £5m and that this type of finance is increasingly important in supporting the UK’s economic recovery. The total client numbers of firms using asset-based finance also grew in 2012, by 3% to nearly 43,000, demonstrating that these products are continuing to be popular with more and more firms which use them to fund business expansion or to overcome short-term difficulties.

In terms of sectoral analysis, the new data indicates that asset based finance is being used extensively to support manufacturing, with over 12,500 manufacturing businesses using these types of funding. The figures show that treasurers in the distribution, transport and construction sectors are also significantly drawing on asset-based finance products.

The UK is, by far, the largest European market for factoring and commercial finance. Statistics for 2012, issued last month by the EU Federation for the Factoring and Commercial Finance Industry (EUF), show that the UK accounts for 24.12% of the total market, followed by France with 15.45%; Italy (15.06%); Germany (13.04%) and Spain (10.27%). These statistics put paid to the common misconception that factoring is more popular in the southern European states than in the north [although this contention is not held by either Baihas Baghdadi or Eugenio Cavenaghi http://gtnews.afponline.org/Articles/2013/Turning_Receivables_To_Your_Benefit.html of Barclays. 

Conclusions

Looking to the future and how 2013 is likely to fare for the sector, the ABFA recently surveyed its members and asked them to predict growth for this year. Overall, expectations are that the industry will grow further over the course of 2013.

The total number of companies using asset-based invoice is predicted to rise by 7% to over 45,000 according to the survey. Sales from UK and Irish firms using asset-based finance are also expected to grow, by 10% from £254bn in 2012 to nearly £280bn in 2013.

While reasonably bullish on the prospects for their own businesses, the ABFA’s members are less optimistic in assessing the general state of the UK economy, with just over 40% of respondents expecting conditions to remain unchanged throughout 2013. The short-term picture is even less optimistic, with almost three-quarters of members expecting no change and only 29% predicting a modest improvement in economic conditions.

These figures confirm the overall confidence in the asset-finance sector at the moment, by predicting encouraging growth across client sales and an increase in client numbers and overall funding levels throughout 2013. This is not only good for the sector but also the UK economy as a whole I would contend, as it releases much-needed finance. George Osborne should breathe a sigh of relief as fears of a further recession slowly recede.

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