A lack of understanding of alternative forms of borrowing such as asset-based finance could be hampering UK business growth, a study suggests.
Research of 2,000 small and medium-sized enterprises (SMEs) from Lloyds TSB Commercial Finance shows that there is still a lack of understanding of asset-based finance, compared to more traditional forms of borrowing such as overdrafts, loans and mortgages.
Almost all SMEs (98 per cent) are aware of overdrafts, but only half (52 per cent) say they are aware of asset-based lending. The survey also shows that a lack of understanding of alternative forms of finance prevents many SMEs from using them.
Invoice finance, where a firm can borrow against the value of customer invoices, is one of the most popular forms of asset-based finance, but understanding of its benefits among SMEs is low.
While over two thirds (70 per cent) of firms are aware of invoice finance, just over half (54 per cent) say they have a good understanding of it and only 15 per cent have ever used it.
Some alternative products are better understood by businesses. Hire purchase and leasing products, which can help SMEs fund new equipment or machinery purchases, is understood by two thirds of businesses (69 per cent) with 36 per cent having used it.
The top three reasons cited by respondents to use alternative finance are to make corporate acquisitions, boost working capital, and invest in property.
Donald Kerr, managing director of Lloyds TSB Commercial Finance says that access to finance is a key driver of economic recovery, and firms need to be aware of the options available to them, particularly those looking to invest and expand.
‘As well as government-backed schemes there are a range of other products and services available of which many businesses are unaware.
‘Firms are more likely to seek out alternative forms of finance if they want to grow, for example by investing in property, or to fund a corporate acquisition.’
However, he says that some also recognise the usefulness of asset-based finance in managing working capital. ‘Asset based finance can provide business owners with the opportunity to borrow against the value of their assets, whether debtors or plant and machinery, providing them with the finance they need to grow.’