Asset based ﬁnance can help many growing companies by providing a funding solution that can actually increase at the same rate as the cash ﬂow needs of the business.
Asset based ﬁnance is surprisingly still a much-misunderstood product, but it is also one of the best ways for a company to ﬁnance itself during a period of change, such as expansion, a change of ownership, an MBO or a turnaround period in a company’s fortunes.
Corporate Britain is waking up to this: according to ﬁgures from the Asset Based Finance Association (ABFA), no fewer than 43,000 businesses now use asset based lending involving invoice ﬁnance, and total lending in the UK is now £16 billion, with a third of this to companies with a turnover of more than £50 million.
Size doesn’t matter
Asset-based ﬁnance is very much a viable option for all businesses, no matter what their size. “In recent years asset based ﬁnance has become the ﬁrst port of call for many corporate ﬁnance advisors particularly with transactions and when working with private equity, as they now see risk in the traditional providers of debt ﬁnance,” says Steve Merchant, Head of asset based lending services at Baker Tilly.
“Many believe there is a greater risk that banks will pull out of providing the debt, whereas asset based lending has a strong track record of delivering.”
Be aware of your options
At its simplest, asset based lending involves invoice ﬁnance, or factoring, whereby a company borrows against, typically, 70 per cent to 85 per cent of the value of its invoices. The level of service the lender provides can vary enormously, from straightforward cash advances to managing the sales ledger, providing collection services and insurance, which may be more expensive, but also absolves the borrower from more of the risk.
Many believe there is a greater risk that banks will pull out of providing the debt, whereas asset based lending has a strong track record of delivering.
As it has developed, asset based lenders (ABLs) will now advance loans against much more, including inventory, plant and machinery and property, as well as, when appropriate, more esoteric assets such as branding. Some ABLs also have the capability to offer a cash flow advance alongside asset based facilities.
The business involved can expect to pay base rate plus two to three basis points, together with a service charge, with the cost depending on the strength of the borrower and any if more services are added on. “The quality of the organisations and their people involved continues to impress and improve, and there are now many major players and many new entrants into the market,” says Merchant. “Whereas once it was an alternative source if you couldn’t achieve funding in the conventional way, through, for example, loans, it is now regarded as the first port of call.”
There are many advantages that cannot be found in other forms of financing. A bank might suddenly withdraw an overdraft, but it is very unlikely to withdraw an asset based facility if the underlying asset is still in place. “An asset based lender closely monitors the security position of the company, which makes it easier to help through difficult times,” says Merchant. And while an overdraft or loan tends to be a ﬁxed amount, the as- set based facility can grow as the business expands.