Securing that elusive cash flow

Kate Sharp, CEO ABFA

Trying to secure finance during a recession can cause numerous headaches for businesses and Managing Directors. But as the economic climate continues to tighten, both large and small businesses are increasingly looking within their business practices to secure a steady flow of funding.

Kate Sharp, Chief Executive of the Asset Based Finance Association (ABFA), discusses the range of business benefits that asset based finance (ABF) can bring to companies and how it can prove to be a flexible and reactive form of funding when other possible streams remain difficult.

The current outlook for the UK economy is bleak with economists and business leaders suggesting that there was a “frightening deterioration” in the country’s finances towards the end of 2008. As unemployment rises, GDP slumps and bank lending continues to tighten, UK businesses are being forced to look for alternative forms of funding in the midst of the credit crunch. With the next 12 to 18 months set to test UK businesses, and indeed those worldwide, now is the time for companies to act and look ahead so they can cope with the turbulent market. The International Monetary Fund's (IMF) own figures make for bleak reading, predicting Britain will contract more sharply than any other nation – with the economy slowing by 2.8 per cent this year alone.

However, having said that, there are still many companies that are thriving and already looking to capitalise on the opportunities when the economy does improve. It is important that these businesses, and those in need of financial support, get the funding and backing they need to capitalise on potential future growth.

It is good to see that in a recent ABFA survey, a surprising 62 per cent of businesses who were questioned have already put in place a dedicated strategy to maximise business opportunities once the upturn does arrive, suggesting that business confidence hasn’t completely faded away and that companies are keen to look forward.

« securing traditional funding … is a challenge »

With not only the UK, but international economies suffering, securing traditional funding through banks and other financial organisations is a challenge. This can be seen in the Bank of England’s own survey which found that on balance 28 per cent more respondents had cut credit to corporate clients rather than increasing it.

As a consequence of this, many companies are looking within their own business practices and examining their own balance sheets more closely to identify where capital is tied up and how they can become more aggressive about utilising their assets.

The ABF industry provides funding against outstanding invoices, premises, equipment, machinery or fleet and is now one of the first ports of call for companies looking for finance. The industry, whose range of products include factoring, invoice discounting and asset based lending, has reported a significant increase in enquiries from small to medium enterprises and larger companies all looking to secure additional funding in times of uncertainty.

« asset-based lending is any kind of lending secured using against an asset »

In the simplest terms, asset-based lending is any kind of lending secured using against an asset. Over the last few years the phrase has been used to describe a structured financial package based upon the values of both current and fixed assets within a company’s balance sheet. Typically, these facilities are tied to stock, accounts receivable, machinery or equipment.

Factoring provides a fast prepayment against a sales ledger. It allows companies, at a cost, to flexibly increase their working capital and improve cash flow. Invoice discounting is an alternative way of drawing money against invoices. However, unlike factoring, the business retains control over the administration of the sales ledger. This option provides a cost-effective way for profitable businesses to improve their cash flow and is often confidential.

Interestingly, last year the use of export invoice discounting jumped by 34 per cent suggesting that more businesses are looking overseas in order to find new contracts, perhaps in an effort to move away from the slowdown in the UK.

Unlike other areas of finance, the asset based finance industry is in fact growing. During 2008, the sector far exceeded expectation and at the end of the year was advancing in excess of 17 billion pounds to UK businesses.

End of year results show that the industry is worth £208,014 million, a growth of nine per cent on last year’s figure of £191,401 million.

While the majority of advances are against debt, such as sales invoices - the latest figures indicate that advances against stock are on the rise. Over £1,603 million, an increase of 168 per cent on 2007’s, was advanced to companies during 2008.

Lending against plant, machinery and property allows ABF to deliver a flexible and robust structure time and again. This is due to the fact that lending against assets rather than earnings during periods of economic or financial instability provides a more stable lending base on which to base credit decisions and risk assessment.

Providing funding solutions for all types of businesses from SMEs to larger multinational companies, asset based finance offers a financial product that is suitable for any company.

These positive figures show indicate that the industry is coping well with the effects of the downturn and continues to finance the expansion and development of businesses, of all sizes, from right around the UK. Indeed as the statistics suggest, asset based finance is now one of the most important forms of corporate funding available for firms.

« while traditional funding still struggles … »

In fact, recent figures and feedback from our members suggest that ABL’s popularity will continue to grow over the next 12 months due to its suitability for supporting business turnaround situations and its broader capability to increase cash headroom in times of need. 57 per cent of ABFA partners reported that they are now receiving a greater amount of new business referrals from foreign banks and independents than in 2008. These increased enquiries have been coming in to act as a bank replacement for a loan or overdraft highlighting that while traditional funding still struggles to cater for the needs of the business population, asset based lending and invoice finance has the appetite and the capacity to finance its growth.

The dynamic linkage between asset based finance and corporate assets makes it ideal for growing companies as the funding grows in line with the business. Unlike some other traditional lending sources asset-based lenders look at the long-term goal of the business and provide support through the company’s growth and expansion. At a time when the availability of finance reduces on an almost daily basis this is a distinct advantage.

Over the next 18 months or so, as banks face increased calls for risk-free lending and with interest rates at an all time low, the market is realising the potential of all three Asset Based Finance products. Asset based finance is the ideal funding route for these turbulent times; it is flexible, robust and is deliverable across many different sorts of transactions, (from management buyouts (MBOs) to refinancing, to turnarounds and buy-ins, growth capital uses, public-to-private etc). Asset based finance has moved from being a little known financing solution, to being right in the heart of mainstream corporate finance - funding over 48,000 businesses in the UK.

In light of the economic woes it is heartening to realise that major funding streams are still liquid and working to help businesses both survive and thrive. With the tightening credit market, it would seem that there has never been a better time for businesses to start realising the benefits of flexible funding options, such as ABL. A corporate debtor book often offers the greatest potential for raising finance.

Case study example

The ABL subsidiary of Belgian banking group KBC Bank recently completed the re-financing of one of the UK’s leading providers of canned food products to the food service and retail sectors. After a successful MBO a few years ago this specialist provider of canned food always kept a close eye on its financial facilities. With the UK economy in recession and with the availability of funding decreasing, the directors decided to seek a re-financing for their business. They had three key requirements: to maximise their financial headroom, to try to achieve a more flexible and robust funding structure and, if possible, to obtain a committed facility.

KBC’s £8.35 million ABL facility was completed in January 2009 and delivered all of these requirements through a complementary mixture of revolving Account Receivables and inventory facilities alongside more traditional banking requirements such as Letter of Credit, HMCE guarantees and Treasury facilities.

On completing the transaction, Paul Hooper, Sales Director at KBC Business Capital said: “This type of business re-financing is typical of the opportunities that are being presented. We are seeing a lot of good companies who are worried about both the availability and certainty of their funding facilities because of the economic and financial climate. Switching away from “on demand” facilities to a three-year Asset Based Lending structure helps to provide the financial stability companies need in today’s economic climate.”

Kate Sharp is Chief Executive of the Asset Based Finance Association
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