The basics of asset-based finance revealed
Borrowing against your sales ledger could help ease your business through the credit squeeze. Here's how
You won’t need reminding that we are in a downturn, but as Simon Woodroffe suggests, entrepreneurs have to be pragmatists: “They will do anything in order to survive,” says the Yo! Sushi founder. “As my mum used to say, there’s no convenient time to have babies, and I think it’s the same with launching businesses.”
Woodroffe went through lean times himself during the early days, and has experience of using asset finance. “The banks are not going to lend against future growth,” he says. “Invoice finance is a way of saying: ‘You have lots of money coming in, so have some more.'”
Ever since the sub-prime fiasco, the banks’ minds have been concentrated on their own balance sheets. Asset finance is more creative and innovative than traditional loan and overdraft finance. Borrowing money against outstanding invoices, premises, equipment, machinery, fleet and even a brand is now the first port of call for many businesses looking to fund growth.
“Factoring and invoice discounting are still not entirely accepted by entrepreneurs as mainstream options,” says Kate Sharp, chief executive officer of the Asset Based Finance Association (ABFA). However, the figures speak volumes. During the first half of this year, the industry advanced over £17.3bn against invoices, stock, property and other trading assets worth a total of £31.2bn – a growth of 15%, while traditional funding grew by just 13.2%.
“As the doors close on traditional lending, businesses have to look elsewhere,” says Sharp. “Many companies are still working through facilities that were agreed in easier times. When those facilities start to come to an end, they are going to find they won’t be renewed, or that they will have to pay more.”
The time is right to consider asset finance
Tim Corbett, chairman at ABFA, recalls the last downturn in the early 1990s, and warns that, even when the storm clouds roll away, it will still be difficult for companies that need growth capital. “Now is a very good time to be considering asset finance to keep the link between your working capital requirement and your current assets,” he says.
The banks like debt finance, because it requires them to hold less capital. As Corbett points out: “It is more structured, better organised and they can see the assets they are lending against.”
Also, Corbett argues that, for the client, it delivers much more than money, as you will have to demonstrate good housekeeping. What’s more, if the package involves non-recourse elements, it will also protect you from the collapse of a customer and the domino effect on your own business at a similar cost to overdraft or loan finance.
Getting the best asset finance deal
ABFA members are divided between large financial institutions and independent providers. Sharp offers the following advice if you are looking to get a deal from one of her members.
… Get at least three quotes
… Talk to at least one bank-owned and one independent provider
… Don’t just look at the headline rates – service is key, particularly if the factor is to become your credit controller
… Apply your own criteria before deciding on a provider
… Don’t wait until your sources of finance and credit have been withdrawn
Many clients are referred to their own bank’s invoice finance arm by their relationship manager. This may suit a larger firm, particularly if it has a complex customer base or sells overseas, says Noel Quinn, European head of commercial finance at HSBC. “Your overdraft facility is a valuable resource that should in any case be reserved for contingencies, not to finance the payroll,” he says. “Invoice finance is a flexible and fluid way to move with the size of your business.”
When it comes to export, an international provider may be vital, Quinn points out. “You know your UK customers. If they are big players, they will probably pay, although they may make you wait – that’s where invoice discounting makes all the difference,” he says. “But how much do you really know about new customers in Taiwan or Chile? How do you collect if you run into difficulties?”
Mark Houlding, managing director of Rostrum, uses invoice finance from independent commercial finance provider IGF, which deals with businesses that turn over up to £15m: “The money wasn’t the main reason we chose invoice finance,” he explains. “Our invoice processes were not as good as we would have liked, but we didn’t want to appoint a finance person at this stage. We needed a provider that could be flexible as we grew the business. IGF convinced us they could accommodate our finance needs now and in the future.”
After an analysis of Rostrum’s financial position, debtor book and growth plans, IGF recommended that the company enter a service-only factoring arrangement, taking responsibility for the processing and collection of the invoices raised each month.
“This freed up two days a month of my time at least,” says Houlding. “They deal with our customers’ accounts people, and it’s just as if they were part of my own office.”
Houlding has also outsourced his payroll. “Our people tend to be quite young, and a few have student loans,” he says. “It can be time consuming, but for a small fee IGF deals with all that.”
Asset finance is not something you can dip in and out of. It’s a bit like marriage, so compatibility matters, but there are successful marriages of convenience too.
Finance director at Bradford printer Storey Evans, Phil Naylor, sees himself as a cynic. In April this year, when the company was bought by its management after neglect by its previous owners, it needed cash. Naylor was unimpressed by the financial institutions he approached, as they seemed to have no interest in the business itself. Eventually, advised by the established Leeds accountancy firm Broadhead Peel Rhodes, Storey Evans secured funding and invoice finance facilities with the Bank of Ireland that enabled it to upgrade its equipment and go after new business. “We manage our own sales ledger. I notify invoices and cash received daily, and I can draw down when I need it. That way, I am not paying interest on money I don’t need right now,” says Naylor.
No longer the Last Chance Saloon, in the current climate asset finance may actually be the only game in town.
Asset finance: the options
Under an invoice discounting service, you continue to administer the sales ledger and the service is usually undisclosed to customers.
Full service factoring
This is a way of providing accelerated cashflow to a business, using the sales ledger as security to borrow money. The lender also provides a full sales ledger management, credit control and collections service.
This is where the factor expects to recover advances made against any debt not collected within a given time period (usually 90 days).
In this instance, the finance house provides credit insurance as part of its overall funding package. This provides a level of bad debt protection against non payment by your customers.
These are the debts that the finance house is willing to cover. Disputed debts are normally called ‘disapproved’, and are usually old debts or bad debts.
When debt finance is in place, this is an arrangement where further finance is made available against other assets, such as stock, machinery or property.