Figures from the Asset Based Finance Association (ABFA) have revealed that average lending to SMEs through asset-based finance rose 3% last year to £9.5 billion compared to 2015.

The association, which represents the invoice finance and asset-based lending industry in the UK and the Republic of Ireland, points out that over the same period, outstanding bank overdrafts decreased by 2% to an average £12.4 billion, according to Bank of England data.

Jeff Longhurst, chief executive officer of the ABFA, said: “Asset-based finance is now a major part of the small business lending space.

“SMEs are realising they can leverage the value of assets such as outstanding invoices for the direct benefit of their businesses.

“Unlocking this capital gives SMEs the means to purchase new equipment, invest in new systems or expand premises and increase headcount to ramp up capacity and capitalise on new growth opportunities.”

The ABFA says SMEs are turning to alternative forms of funding as banks continue to be constrained in their traditional lending to the sector.

Asset-based finance enables businesses to secure funding against a diverse range of assets. 

Invoice finance (which is secured against the value of unpaid invoices) is one of the most widely used forms, but asset-based finance can also include lending against inventory and plant and machinery as well as intangibles such as brand value and forward income streams.

Longhurst added: “While bank overdrafts can be withdrawn at short notice if companies are deemed no longer to need them, for instance during peaks in business, asset-based finance is a longer-term option, making it easier for companies to plan for the future.”