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Invoice and Asset Based Lending: an assured finance option for 2009
Peter Ewen, Managing Director of Venture Finance, outlines how, in these recessive economic conditions, Invoice and Asset Based Lending (ABL) is rapidly becoming the darling of the corporate finance industry.
Our own research, commissioned among UK accountants, identified that ABL (in the form of advances against assets) has enjoyed a 50 per cent leap in popularity in the last twelve months. Over the same timeframe, interest in high street bank overdrafts remained static.
The search for responsible and responsive alternative lending is borne out in our experiences at Venture. We have witnessed more enquiries during the last year than ever before. Due to the tightening of the major banks’ lending criteria, a greater number of businesses are turning to creative funding options such as Invoice and Asset Based Lending to provide extra financial stability during this uncertain period. Enquiries are also up from business advisors looking to support and retain their core relationships through partnering with a creative, independent and crucially, experienced lender.
ABL as a funding option
For those that don’t have experience of using an Invoice Finance or ABL service, it works by unlocking the value of a business’ assets and releasing working capital into the business.
ABL is provided as part of a receivable (invoice) finance package that includes an Invoice Discounting or Factoring service. Both release working capital from unpaid invoices, as soon as they are raised, providing the business with a cashflow boost. If required, further funding can then be released from different assets that the business may possess. These assets can be in the form of unpaid invoices, inventory, property, plant and machinery or even more intangible elements such as brands or intellectually property.
Benefits and applications
A funding package that includes an element of ABL - whether it is to help cashflow, turn a business around, or complete an acquisition - provides long-term financial support. This is because part of the funding is provided against revolving assets (receivables and sometimes inventory) in addition to fixed assets, and allows the funding to grow in line with a business’ sales. This means that ABL’s benefits are not confined to the immediate period after the funding is provided.
This ability to deliver long-term, flexible financial support means that ABL is particularly suited to supporting an acquisition, as it reduces the strain on a company’s cashflow during the often-difficult post-deal phase. In addition, ABL is being used by a growing number of management teams seeking finance for a management buy out (MBO). ABL’s flexibility is perfectly suited for MBO funding requirements. It allows a team to leverage assets from within its business to unlock capital to enable the purchase and retain control post-deal, without having to surrender some of the business to an outside investor.
Difficult financial conditions have also contributed to another emerging trend: private equity houses awakening to the benefits of working with asset based lenders for larger structured deals. Increasing numbers of such firms support the use of ABL as it can reduce concerns over complex covenants breaches at various stages in the business’ life cycle.
ABL can also be invaluable in a business turnaround situation. Its revolving nature when delivered against receivables and inventory, means funding levels can grow to match current assets level owned by the business, delivering a level of flexibility that traditional overdraft or bank loans can’t match. ABL provides sufficient liquidity to execute restructuring plans. Cash is king and, in difficult times, a steady stream of working capital can make the difference between whether a company will sink or swim.
Choosing an Asset Based Lender
The best Asset Based Lenders are dedicated to building lasting relationships with clients, often acting as a trusted advisor for a business’ management team during an acquisition or a similarly trying period.
With a strong relationship and understanding of the client’s business in place, an Asset Based Lender can often coach and guide a client through the woods by anticipating common pitfalls and offering creative solutions. This dedication to client service is often a decisive, if intangible, element to business success.
The team at Venture Finance has extensive ABL experience at both SME and the larger corporate end of the market. Far from treating clients like anonymous account numbers, we know all our clients as individual people. Key to this is the number of clients that each client manager has in their portfolio – at Venture, the figure is typically half that of the banks’. This personalised approach ensures good understanding of the nuances and needs of a business.
Venture Finance will celebrate its 20th anniversary in January 2009, and I am proud to say that we still work with our very first client. Richmond Caterers switched from inflexible bank Factoring to newly formed Venture Finance back in 1989 and have not looked back.
There has never been a better time for businesses to start realising the benefits of ABL: the current credit conditions are forcing more and more businesses to look beyond traditional sources of finance. What’s more, the Government has recently scrapped the assignment ban on SMEs using Invoice Finance, (often to assist with cashflow) while they work on potentially lucrative local government contracts.
Looking ahead, I also believe that ABL will play an increased role in the larger structured deals that are undertaken. Although the number of acquisitions is likely to slow down in 2009, those that are completed will be more likely to include an element of Invoice and Asset Based Lending in the funding structure. Indeed it may be one of the few funding options available that will allow deal completion, due to its ability to leverage funds.