Resisting The Squeeze

News that US brokerage firm Bear Stearns has been toppled by the credit crunch sent further shock waves through the financial community. Like Northern Rock’s failure, Bear Stearns' demise increases the danger of the broader financial system freezing up. We have already seen tightened lending conditions as a result of the sub-prime mortgage crisis and can expect banks to become increasingly risk-averse.

However, one financial market that is bucking the downturn is the asset-based finance industry. End-of-year results released by the industry’s trade body, Asset Based Finance Association (ABFA), demonstrated record growth, with industry value topping £191bn for the first time.

Fourth quarter statistics also revealed a 12% growth in client sales, meaning that the asset-based finance industry has more than doubled since December 2000. ABFA members advanced £15.7bn to over 48,000 UK companies last year, an increase of 16% on 2006 figures.

This continued growth has partly been driven by large public companies turning to invoice finance and asset-based lending to fund buyouts, acquisitions and significant expansions. In the last year alone, the number of clients turning over £1bn or more has increased by approximately 65% while their advances grew by 38%.

The increased prevalence of asset-based finance can also be seen in the number of syndicated deals lead by ABFA members. At the end of December 2007, our members were the lead financiers on deals worth £1.2bn compared to £918m at the same time last year.

In recent times the sector has also seen a growing number of companies seeking to leverage the working capital tied up in stock. The number of clients using stock finance increased by 49% in 2007 and, while outstanding debt is still the predominant asset, stock security values grew by 48%.

PROVEN RESILIENCE

In contrast to the general industry growth, we have witnessed a decline in the number of retail and services clients using asset-based finance. Apart from financial institutions, these two sectors have been hardest hit by the credit crunch and it is well known that they have scaled back expansion plans. However, it is not yet a cause for concern as together they still account for nearly a third of our client base. In addition, the drop is more than compensated for by the uplift in the number of construction and distribution clients on our members’ books.

Conversely, tough market conditions and sterling’s fall against the euro could be behind the growth in export invoice discounting. The use of export invoice discounting has jumped by 41% indicating that more businesses are trading overseas, perhaps in an effort to dodge the slowdown in the UK.

For a market that is still in its infancy, figures are looking good. Recently, we predicted the industry would advance more than £40bn by 2016 if the UK followed the US market’s average growth rate of 12% over the past ten years. That prediction now looks conservative in light of the announcement that the ban on assignment within government contracts will be abolished.

After lobbying from the ABFA, the lifting of the ban on assignment will mean that thousands of companies using invoice finance will now be able to compete on a level playing field for government contracts.

The asset-based finance industry has proven its resilience and shown that it can continue to grow in tough economic conditions. More importantly, our members have proven to be a lifeline to UK companies who have experienced tightened lending conditions and needed alternative sources of funding to sustain growth.