Asset-Based Finance: Invoice Finance, Trade Finance, and Supply Chain Lending

Asset-based finance (ABF) — a broad category of lending secured against specific business assets rather than general corporate creditworthiness — has emerged as a distinct institutional asset class. For investors, it offers several attractive characteristics: short durations (weeks to months), self-liquidating collateral (receivables that are contractually due to be paid), low correlation to equity markets, and floating rate structures that benefit in high-rate environments. This guide explains the main sub-categories and how HNW investors can access them.

What Makes Asset-Based Finance Distinctive

Traditional corporate lending is secured by a general charge over the borrower's business — the lender's recourse is to the entire company in the event of default. Asset-based finance is different: the loan is secured against specific, identified assets whose value is largely independent of the borrower's financial health. The return of capital depends on whether the underlying receivable or trade transaction performs, not primarily on whether the borrower's broader business is profitable.

This structural distinction creates several investment characteristics:

• Short duration: Most ABF assets mature in 30–180 days. The portfolio turns over rapidly and re-prices to current market rates.
• Self-liquidating: Receivables are paid by third-party obligors (the borrower's customers), not by the borrower itself. If the borrower fails, the lender may still recover the receivable from the end-customer.
• Granularity: Large portfolios of small receivables provide diversification at the obligor level that is not available in single-company corporate lending.
• Low duration risk: Short-tenor assets have minimal sensitivity to interest rate movements.

Invoice Finance (Receivables Financing)

Invoice finance — also called accounts receivable finance or factoring — is the most established form of ABF. The borrowing company assigns its outstanding invoices (money owed by customers for goods/services delivered) to a lender or factor in exchange for an immediate advance of 70–90% of the invoice face value. When the customer pays the invoice, the lender remits the remaining 10–30% to the borrower, less fees.

Factoring: The lender (factor) takes ownership of the receivable and collects payment directly from the customer. The customer is notified of the assignment. The factor bears the credit risk of the customer (in non-recourse factoring) or has recourse to the borrower if the customer fails to pay (recourse factoring).

Invoice discounting: The borrower retains administration of its own ledger and collects payments itself; the lender has a security interest over receivables but the customer is not necessarily notified. Cleaner from a customer relationship perspective.

Supply chain finance (SCF) / reverse factoring: The buyer (a large, investment-grade corporate) initiates the programme. The buyer instructs its bank or SCF platform to pay suppliers early (at a discount reflecting the buyer's credit quality, not the supplier's). The platform earns the discount; the supplier receives early payment; the buyer extends its Days Payable Outstanding (DPO). Dominant platforms include Taulia, C2FO, and Greensill-successor entities.

Typical yields for investment-grade receivables: SONIA/SOFR + 1.5–3.5%. For sub-investment-grade or concentrated obligors: higher.

Trade Finance

Trade finance covers the full range of financial instruments that facilitate international trade:

Letters of Credit (L/C): The importer's bank issues a letter of credit guaranteeing payment to the exporter on presentation of compliant shipping documents. The exporter's bank (or a trade finance fund) may purchase (discount) the receivable before maturity at a spread over risk-free rates.

Documentary Collections: The exporter ships goods and presents shipping documents through the banking system for payment; less secure than an L/C but more common in established trading relationships.

Trade receivables: Short-term claims arising from cross-border trade transactions — the most common raw material for trade finance funds.

Commodity trade finance: Financing the purchase, storage, and transportation of physical commodities — oil, metals, agricultural products. Secured against the commodity itself (warehouse receipts, title documents). Higher complexity and operational risk than vanilla trade receivables.

Institutional trade finance funds (Muzinich, Vontobel, Abrdn, BlueBay) invest in portfolios of trade receivables, providing investors with diversified, short-duration, floating-rate exposure to international trade flows.

Key risk: Fraud. The Greensill Capital collapse in 2021 demonstrated that trade finance fraud (fabricated receivables, circular financing, concentration in a single counterparty) can be catastrophic for investors. Due diligence on fund manager controls is paramount.

Asset-Based Lending (ABL)

Asset-based lending in the corporate context refers to revolving credit facilities secured against a borrowing base of current assets — receivables, inventory, and sometimes equipment. The borrowing base is calculated as a defined percentage of eligible assets:

• 85–90% of eligible receivables (excluding overdue, disputed, or concentrated).
• 50–65% of eligible inventory (lower, reflecting liquidation value uncertainty).

ABL is predominantly a bank product for corporate borrowers in the UK and US. HNW investors can access it through:

• ABL fund structures: Private credit funds that originate ABL facilities directly to mid-market companies, providing institutional-grade collateral monitoring and borrowing base management.
• Business Development Companies (BDCs) (US-domiciled): Listed investment companies that lend to US mid-market companies, often with ABL facilities forming part of a broader first-lien portfolio. BDCs are required to distribute 90%+ of income, making them income-generative for investors.

Warehouse Lending and Mortgage Pipelines

Warehouse lending finances mortgage originators during the period between originating a loan and selling it to a securitisation trust or whole loan buyer. The originator draws on the warehouse line for each mortgage funded, then repays when the mortgage is sold. Turns are rapid (typically 30–90 days), and the collateral is individual mortgage loans.

This niche is predominantly institutional but appears in some specialist credit funds focused on UK residential mortgage-backed securities (RMBS) origination pipelines.

Receivables Securitisation

When a portfolio of receivables is large enough, it may be securitised — packaged into a special purpose vehicle (SPV) that issues notes to investors, with the receivables cash flows servicing the notes. Receivables securitisation is a major institutional market:

• UK auto loan ABS: Issued by major car finance companies (Volkswagen Financial Services, BMW, Stellantis).
• UK consumer loan ABS: Issued by banks and specialist lenders.
• Trade receivables CLOs: Securitised pools of trade receivables, providing tranched exposure.

Investment-grade tranches of these structures can be purchased by sophisticated investors seeking higher yields than government bonds with asset-backed security. Credit ratings from Moody's, S&P, and Fitch provide standardised risk benchmarks.

HNW Access Routes

For HNW investors, the principal access routes to ABF are:

Trade finance funds (£250k+ typically): Specialist UCITS or AIF structures investing in diversified trade receivable portfolios. Available on private bank platforms. Key managers include Vontobel, Muzinich, Fasanara Capital, and Abrdn.

Private credit funds with ABL focus: Closed-ended AIFs offering 6–10% target returns via diversified ABL portfolios. Minimum commitments typically £250,000–£500,000.

FCA-authorised online lending platforms: Platforms such as LendingCrowd, Folk2Folk (for UK agricultural lending), and MarketFinance (invoice finance) offer retail-accessible ABF investment. Due diligence on platform quality and credit controls is essential.

UK-listed investment companies: Some closed-ended investment trusts listed on the London Stock Exchange invest in ABF strategies — providing daily liquidity and transparency for investors who cannot access the underlying fund structures directly.

Risk Factors

• Fraud and misrepresentation: The greatest risk in invoice and trade finance. Borrowers can present false invoices; SCF platforms can have undisclosed concentrations. Manager controls and independent verification are critical.
• Obligor credit risk: If the end-customer fails to pay the receivable, even self-liquidating structures suffer losses.
• Liquidity: Private ABF funds are illiquid during their lock-up periods despite the short duration of underlying assets. Open-ended funds may gate in stressed conditions.
• Operational complexity: ABF requires specialist borrowing base monitoring, legal documentation, and collections infrastructure. Manager quality is the primary differentiator.

How Global Investments Can Help

Global Investments brings 32 years of expertise to alternative credit across all stages of the capital structure. We can help you evaluate ABF fund managers, assess the credit quality and operational controls behind specific trade finance or invoice finance vehicles, and integrate short-duration floating-rate credit into your overall fixed-income and alternatives allocation. For clients with international business interests, we can also advise on structured SCF facilities that may benefit both your personal portfolio and your corporate treasury.

---

The value of investments and income from them can fall as well as rise. Asset-based finance involves credit risk and potential capital loss. This guide is for information only and does not constitute regulated investment advice. Seek professional advice before making any investment decision.