Recent figures indicate that while high street bank overdraft-lending to the SME market has declined from over £6bn to around £0bn since 1993, the asset-based lending market has increased from £2bn to over £6bn in the same period.
This trend is set to continue, with greater computerisation of the lending process. We are likely to see a reduction in the human face of risk management and the emergence of what has been called ‘virtual factoring’. Why bother with people, the argument goes, when computerised risk assessment can do the job far more effectively?
This could well mean more discomfort for the factoring and invoice discounting industry as a result of problem lending, and competition within the asset-based lending market will only accelerate growth and exposure in this area. If a customer seeking invoice finance can’t provide security then more imaginative finance providers will offer more complicated derivatives associated relationships to avoid losing the business.
While the high street clearing banks still have the lion’s share of the market, the industry is still in its infancy and new players, who have to find a new angle to attract business and find customers to lend money to, are constantly entering the game.
We’ve all seen this type of behaviour, with lenders falling over themselves to get money into the market. Experience tells us what is likely to happen and only the most optimistic would speculate that asset-based lending is the universal panacea for ailing companies.
Historically, clearing banks would lend 50% of good book debts while the invoice discounting market will lend 70%, 80%, 90% or more of the sales ledger.
UK SMEs have the scope to become more and more leveraged, and therefore more and more fragile and susceptible to a small reduction in margins.
In addition we have not seen the relationship approach to lending adopted by the clearing banks being put to use in the asset-based lending market.
A good deal of lending is performed on a transactional basis with lending and recovery decisions being based on different sets of principles. Turnaround and recovery specialists need to be ready for the different approach to rescue and recovery that this market demands.
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