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How do entrepreneurs break out of a cycle of constrained cash flow and under-investment?

The latest business optimism report published by the British Chambers of Commerce last month suggests that while the confidence of smaller businesses in the UK has improved as the political backdrop has started to stabilise, many are failing to invest for the future amid a lack of cash to do so. The BCC said its investment and cash flow benchmarks stand at close to all-time lows. In other words, while many entrepreneurs finally see better times ahead for their businesses, they are struggling to prepare themselves to take advantage.

Asset finance could be the answer. Data published this week by the Finance & Leasing Association reveals that new asset finance borrowing increased 6% in 2019 to reach a record total of £35.7 billion over the year as a whole. Asset finance, where businesses securing borrowing by using the value of their assets as collateral – usually physical assets such as plant and machinery – has become one of the fastest-growing areas of the funding marketplace for entrepreneurs.

That’s encouraging news. Asset finance can be a flexible and scalable way to fund a business as it expands. The most obvious use of such funding is to support businesses acquiring new assets as part of their growth plans – new machinery, IT equipment or vehicles, say. Without finance, this investment would not be possible, so being able to use the new asset as collateral represents a key to unlocking growth.

But asset finance can also release capital for many other uses. By borrowing against the value of assets they already own, businesses can secure significant amounts of funding. This might be useful for anything from working capital to underwriting merger and acquisition activity.

Such transactions can be structured in different ways. Some asset finance deals are straightforward loans – much like a mortgage but secured against an asset rather than a property. Others are more like leasing arrangements, where the lender buys the asset from the business but then leases it back to them for ongoing use. Either way, it is possible to free up substantial capital.

Asset finance isn’t suitable for all businesses. It works particularly well for companies that depend on plant and machinery to operate and may be less ideal for those that are more reliant on intellectual capital. And, of course, the money must be repaid. However, the industry has become increasingly innovative in recent years, developing new types of product in order to expand its appeal.

In doing so, asset-based lenders, in common with invoice finance providers, which offer funding secured against the company’s stock of unpaid invoices, are stepping into the gap created by banks retreating from small business finance. And since they’re lending against physical collateral, they’re often able to do so on more competitive terms than traditional types of loan.

The bottom line is that asset finance provides businesses with a means to invest for the future even when their current trading isn’t throwing up enough cash to fund their ambitions. For businesses confident about their prospects but lacking the resources to back their ambition, asset finance therefore offers a valuable lifeline.

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