Asset-based finance could come into its own as the world financial crisis worsens the economic downturn, a Midland lawyer has predicted.
Stephen Maskell, head of banking and finance for Else Solicitors, based in Birmingham and Burton-on-Trent, warned that cash flow was king for companies trying to keep afloat.
Factoring and invoice discounting were ways of ensuring that the money kept coming in, particularly for small firms.
He believes that, with traditional bank funding suffering at the hands of the credit crunch, more and more businesses are looking to alternatives.
And, though asset-based finance is not new, many are likely to ponder whether they should go down the route.
Typically the system allows firms to get up to 80 per cent of invoices paid straight away without having to wait.
With invoice discounting the firm itself chases the outstanding bill and then transfers the necessary funds to the invoice discounting company.
With factoring, it is up to the factoring company to pursue what is owed.
The legal principles underlying both are the same – finance through the purchase of debts.
There has long been a degree of scepticism about both, mainly because they have tended to be used by those unable to obtain traditional banking facilities.
The downside of factoring is that customers know the company is using commercial finance to improve its cash flow, and the firm chasing payment may become too zealous and forceful when dealing with valued clients.
And both methods can be expensive.
Mr Maskell said: “Asset-based finance is nevertheless well worth exploring.
“It will certainly become more popular as banks’ unwillingness to lend continues. I think it will gain momentum.”
He acknowledged that in the past it had suffered to some extent by “the perception that it was part of the sub prime regime”.
But it had become more respectable in recent years.
In the West Midlands it tended to be popular with owner-managed businesses and the manufacturing sector, particularly in the Black Country.
Mr Maskell went on: “It is set to get much more widespread – that seems inevitable.
“As the financial noose tightens small traders will be forced to look elsewhere otherwise they will risk going under. Cash flow is the lifeblood of any business.”
Asset-based finance was not without its own challenges though. Debtors could get into difficulty as indeed could small factoring companies.
But the official figures confirm its growing importance.
According to the Asset Based Finance Association (ABFA) during the first half of the year, the industry advanced over £17.3 billion against invoices, stock, property and other trading assets worth a total of £31.2 billion, a growth of 15 per cent.
This exceeded that of traditional funding to private non-financial organisations which grew by just 13.2 per cent over the same period.