Introduction
Asset based lending has evolved out of a simple invoice discounting facility
into a much broader one that provides funding
against the full range of assets on the balance sheet.
But before invoice discounting there was factoring, and it was then that an
early negative image was established.
SMEs with cashflow difficulties that were leading them towards insolvency turned
to factoring to help them release cash
back into the company outsource debt collection and allow the business to move
forward.
However, SMEs were not the only ones to realise that their outstanding invoices
represented the largest single asset on
the balance sheet and in recent years, larger businesses that did not
necessarily want to pass over the management of
their sales ledger to a third party have realised the benefits of raising cash
against invoices to fund growth.
Thus, factoring evolved into invoice discounting and made the transition from
negative to positive.
The product has improved and along with it, the profile of its users has also
blossomed.
Today, invoice discounting and its broader based sister asset based lending
funds a much larger appetite for capital than
ever before and the size of deals being completed based on asset based lending
funding keeps on growing.
Bank losses
Several factors have been at work to promote the popularity of asset based
lending in recent years.
Naturally, there has been the snowball effect – the more companies that
successfully utilise asset based lending, the more
its popularity has grown and its success has become self-perpetuating.
But there has also been the push the industry has received from the banking
sector.
In the 1980’s, the UK banks incurred huge losses through unsecured business
loans, which made them increasingly reluctant
to lend money to small businesses in particular, unless there was virtually no
risk involved.
It thus became difficult for many companies to raise finance.
Their traditional route via the overdraft was no longer available to them, so
they began to look elsewhere, and
specifically towards invoice discounting, for their financial needs.
This situation was made more acute by a number of high profile court cases (Brumark,
in particular) that further weakened
the banks’ ability to recoup their losses in the event of a business failure.
These cases set a precedent that the bank no longer had priority above other
creditors in the case of insolvency.
As a result, they actively encouraged their smaller, more risky customers to
look elsewhere for funding.
New providers
Invoice discounting was the happy recipient of this change in focus and the
market has flourished.
Growing demand has led to an influx of new providers entering the market and
competition has become fierce.
To attract new clients, this growing band of providers has had to become
increasingly innovative in the way they present
their offering and the benefits they provide, turning invoice discounting into a
viable option for companies looking to
fund any number of business circumstances.
Benefits
Today, asset based lending brings with it a number of benefits.
Most importantly, it provides immediate access to the cash tied up in a
business’ assets.
It is also exceptionally flexible. You only borrow what you need and, as the
assets on the balance sheet increase, it is
possible to increase borrowing against them should it become necessary.
This revolving facility means that assets and capital equipment are financed
from revenue as the business uses them,
without tying up working capital or stock and it is frequently possible to
access a higher level of funding through asset
based lending than alternative options.
Attractions
It’s easy therefore to see the attraction of asset based lending, and there are
a number of indirect benefits to consider
as well.
For instance, because increased cashflow means that funds are available to pay
bills promptly, it may be possible to
negotiate better discounts with suppliers.
There is also the ultimate attraction of utilising asset based lending to help
maximise profits as the cash injection
asset based lending delivers can be effectively used to explore new
opportunities and markets for the business.
In fact, asset based lending has something to offer most companies, whatever
stage of their business cycle they are at.
Young businesses can utilise invoice discounting in particular to help stabilise
cash flow and get established.
Growing
enterprises can use the facility to help them fund that growth.
Established businesses turn to asset based lending to help them maximise the
opportunities open to them, like developing
new product ranges or nurturing new contracts.
Product flexibility
Not only are more and more businesses appreciating the benefits of asset based
lending, but the number of industry sectors
where it is appropriate is expanding too.
Traditionally, asset based lending products have worked best for non-contractual
debt, where goods were seen, sold and
forgotten, making it particularly relevant to companies operating in the textile
and garment industry, manufacturing and
wholesale sectors.
Providers steered clear of industries where contractual debt was the norm and
the dividing line was very clear.
Today the distinction between the two is less obvious, and there is no longer a
black and white division of when asset
based lending is appropriate and when it is not.
The playing field is more dominated by varying shades of grey.
As providers have extended their knowledge and understanding of asset based
lending, their expertise in applying it has
increased and they are keen to find ways to structure deals rather than look for
reasons not to.
Contractual debt is no longer entirely taboo and providers have become
increasingly willing to invest the time to
understand the terms of the contracts and develop an effective exit plan that
gives them the confidence to deliver funding
to a broader range of industry sectors on a selective basis, for example
construction and telecommunications.
The importance of managing credit control
The desire to do deals wherever possible doesn’t mean that asset based lending
providers are willing to give money to one
and all.
For one thing, they absolutely insist that their clients can demonstrate a clear
ability to effectively manage their
debtor book.
Any company looking for an asset based lending partner will need to be able to
demonstrate strong financial management and
an iron grip on credit control.
What worries many providers is that the sudden injection of cash will distract
the management team from the need to
effectively manage debt collection.
It’s not unheard of for businesses to strike up a relationship with an asset
based lending partner, receive the cash
injection and enthusiastically set about utilising the cash, forgetting to keep
a close rein on debt collection, because
they already have the lion’s share of the money and cease to prioritise
collecting the debts.
Such relationships are short lived and it cannot be stressed strongly enough how
important it is to retain the control and
discipline to collect monies efficiently.
Future demand
Looking to the future, there doesn’t appear to be any relief in the demand for
asset based lending.
The danger is that
some providers will make reckless decisions in the desire to remain competitive
and will pay the ultimate price, resulting
in some consolidation in the market.
Going forward, it is important for providers to strike the right balance between
building steady performance and fast
growth.
Due diligence and prudence are equally as important as competitive edge and
those providers that invest the most effort
into honing their expertise will undoubtedly come out on top.
With an increasing trend towards accessing all funding from one source, those
providers that offer the broadest range of
products will reap the rewards, provided that they fully commit resource,
knowledge and expertise to their asset based
lending facilities and not simply position them as ‘add ons’ to their mainstream
products
Mike Harrison is is Regional Sales Director at leading asset based lender
Enterprise Finance Europe.
Source:
Credit Control Journal |
