Asset-based finance: Is it still an alternative source of capital?

Has asset-based finance really shed the ‘alternative finance’ tag and could it provide a useful resource for your business?

Asset-based finance, traditionally seen as a lender of last resort, has enjoyed a blossoming of its reputation in recent months, but has it really shed the ‘alternative finance’ tag, and could it provide a useful resource for your company?

Peter Ewen, managing director of invoice finance provider Venture Finance, isn’t overly enamoured with the term generally used to describe his sector. “When I think of ‘alternative’, I think of comedians. To me it’s an oxymoron. Alternative comedians don’t make you laugh.”

The problem with describing asset-based finance (ABF) – which includes factoring, invoice discounting and asset-based lending – as ‘alternative’ is that it suggests something less popular, or even desirable, than what’s available in the mainstream. And while the industry’s own trade association, the Asset-based Finance Association (ABFA), still uses the term as shorthand, there’s a growing sense that its time on the sidelines is coming to an end. Last year, asset-based financiers advanced in excess of £17bn to UK businesses, with the industry itself worth an estimated £208m, a growth of 9% on the previous year’s figure of £191m.

Some of that expansion can be attributed to a freeze in finance coming from more ‘traditional’ sources, of course. In fact, being seen as an alternative to banks won’t have done the industry any harm in recent months. “Our press has improved as the banks’ has deteriorated,” says Tracy Ewen, managing director of commercial finance group IGF. “We’ve gained a lot on the back of their negative press.” Some of the industry’s leading practitioners, however, are concerned that ABF still has an image problem among entrepreneurs.

Asset-based finance: a last resort?

Chief among the negative connotations stubbornly sticking to ABF is that it’s a last resort used by ailing companies contending with cashflow problems. A useful outlet in a downturn, certainly, but hardly something that profitable, growing companies will want to be associated with.

“Simply because the industry has the ability to fund a struggling business more than they can be funded through a loan or overdraft, I don’t think it should be given the stigma that it’s only there for when you’re dying,” says Kate Sharp, chief executive of ABFA.

For some companies, it will be a lifestyle product. “In a recruitment company, there are no assets other than what it has sold,” Sharp continues. “The debt is all it has. It must pay its suppliers the week that it has done the work, but won’t get paid for 30 days.”

This type of business can struggle to get a loan or an overdraft facility, she says, because “the bank has no comfort in the business”.

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Gary White, corporate finance partner at chartered accountancy firm CBHC, agrees, adding that ABF’s popularity has grown as the UK ecomony has become more service-based. “In most cases, the main asset these companies have on the balance sheet is the debtor book. They don’t have factories or big freehold properties they can borrow against,” he says.

Since new or adjusted facilities can be secured surprisingly quickly, ABF can be well suited to fleet-of-foot entrepreneurial businesses. “I had a client that was a two-partner company. One was in Vietnam on holiday and they needed to increase their invoice discounting facility. The other rang up in a blind panic. I contacted the provider and it was sorted very quickly,” recalls White.

But ABF isn’t just about emergency cashflow provision for those excluded by traditional financiers. ABFA is keen to remind entrepreneurs that it can also be employed around key events, such as acquisitions, management buyouts or new product launches.

“There will be companies that choose to use it for periods in their corporate life cycle, when they want to acquire something new, or grow in a new market,” Sharp confirms.

Indeed, since invoice discounting facilities often involve a fixed charge element, it can be more economical to secure larger amounts of funding – for an acquisitions ‘war-chest’, for example. “The charge is typically between £10,000 and £12,000, and it would be that whether it was a £1m-turnover company or one doing £10m,” explains White. “So it suits someone looking for more. When you put that to clients looking to raise a chunk of cash, they’re usually pleasantly surprised.”

ABF is not, however, blind to unfavourable sectors, even for growing, viable firms, according to White. “I’m working with a business that has a £30m turnover and is looking to expand,” he says. “It has a £1.1m invoice discounting facility at the moment and needs £5m. We’re hitting resistance, because it’s in a sector that asset-based financiers don’t like: contractual construction work. In certain industry sectors, they still won’t want to know.”

Flexible funding

Mike Lawrence, chief executive of kitchen equipment distributor Waterline, has used confidential invoice discounting since 1991. In that time, his firm grew its turnover from £6m to £90m, although challenging trading conditions have seen revenues retreat to £70m over the last 18 months. Lawrence believes that, for the right company, ABF is a resource for all seasons. “It’s not about distress, it’s about help,” he asserts.

The fitted kitchen supplier has “a seasonally adjusted business”, which requires annual adjustments to its cashflow provision. These have been provided “almost on the nod” each year. “If you went to a bank, you’d be filling in forms every year to do that, because you’d have a new manager and he wouldn’t understand your business,” says Lawrence.

Using the confidential version of invoice discounting meant Waterline could keep its relationship with its customers at the same time as benefiting from “a huge cash inflow that set us on the path to where we are”.

Lawrence emphasises the flexibility a good relationship with an invoice financier can provide, especially around supporting key events in a company’s growth. “We purchased a couple of companies between 2001 and 2007,” he explains. “We always borrowed money from [our invoice financier], which tailor-made a product for us. They’re not just there to give you money against your invoices; they’re far more entrepreneurial in understanding our needs.”

Management information

The rapport Lawrence values so highly has been built around the kind of relationship management long since abandoned by most major banks. Ironically, a slight majority of ABF providers are owned by banks. Even the first major factoring company in the UK, International Factors, was wholly owned by Lloyds. “People have had the view that factoring and invoice discounting is separate from banking, but if you look around, every major bank has an ABF arm and probably has had for nigh on 40 years,” says Tracy Ewen.

However, even those providers that are subsidiaries of major banks have retained a closer, more flexible relationship with their customers than their parent company. Perhaps this is because working with a company’s debtor book means providing a product that’s dynamically linked to the way that the business is working. There will, of course, be differences between providers, and broadly, between bank-owned subsidiaries and independent finance houses.

“If you want anonymity, a process-driven culture, large volume transactions and you’re not interested in guidance, go to a bank factor, because it can provide it cheaper and better than the independent market,” argues Ewen. “But if you want to grow the business with day-to-day contact, go to an independent.”

Either way, the very nature of ABF will usually mean a closer, more visceral relationship with your provider, because it’s based on the day-by-day reality of your company’s trading performance.

One way this manifests itself is in regular auditing. “For the last 18 years, our provider has come in once a quarter to look through the systems and how we’re carrying out our business. I find that a comfort,” says Lawrence. “It keeps another handle on our company.”

But not everyone welcomes this management information burden. “One of my clients has to have management accounts ready every month in detail instead of quarterly, costing it £3,000 a month instead of a quarter,” says White. “Some of the smaller clients are being turned off.”

Tracy Ewen, however, believes this shouldn’t be prohibitive as it will be tailored to a firm’s size. “If we’ve got a one-man band haulage company with a £25,000 facility, we’re not going to be asking for monthly management accounts,” she says. “We do put reporting restrictions on the more sophisticated facilities for our own security. If they can’t keep their own financial position in check, you wouldn’t want to throw money at them.”

A flexible, reliable service that grows with your company, which is both quick and relatively easy to secure, sounds like a boon for fast-growth businesses. However, it has taken a global recession to draw attention to the fact that ABF is about more than failing businesses. “I’m one of the few people who hopes this recession will last a little longer,” says Kate Sharp. “Getting people to understand what this product can provide will give us the place in the mainstream we deserve.”


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