Businesses 'turning to alternative funding'

Businesses in the UK have faced many obstacles over the last few years when it comes to getting access to lending.

Most banks are reticent to lend large amounts of money after the financial crisis, while government-backed initiatives - such as the Bank of England's Funding for Lending scheme - have been criticised for not being effective enough.

Because of this, many firms are turning to alternative sources of funding, with invoice discounting proving to be very popular, the Financial Times reports.

The practice sees money provided in lieu of unpaid invoices and according to figures provided by the Asset-Based Finance Association (Abfa), its use was up 16 per cent year-on-year at £62.5 billion during the final three months of 2012, which compares with a £2.4 billion drop in net lending during the same period.

The appeal of invoice discounting comes from the fact it is seen as cheaper and more accessible than traditional forms of lending, but it may not be appropriate for business who rely on customer sales, as they reserve the right to return items.

Technology companies are particularly worried about the lack of available credit, as they think it is leading to missed business opportunities. Research by Grant Thornton found 19 per cent of London's Tech City firms have made people redundant because they cannot get access to lending.

Indeed, of the 43 per cent of firms who were able to raise further capital, almost a quarter (23 per cent) experienced problems along the way.

This risk-averse situation has increased the use of invoice discounting, but some people think the asset-based finance sector needs regulating, as complaints about the practices of some providers swell.

Abfa is currently in the process of getting its 30 members - which account for 95 per cent of all asset-based lending - to sign up to a system of self-regulation and it is hoped this will address some of the issues that businesses have with lenders.