Asset Based Finance

Kate Sharp The Industry

The Asset Based Finance Association (ABFA) is the trade association for an industry with fifty years experience of supplying much needed liquidity to clients.

The members provide factoring, invoice discounting and asset based lending (ABL) to 43,000 UK and Irish businesses. Last year the total annual turnover of companies using asset based finance (ABF) reached more than £250bn, while the total funding at the end of the most recent quarter available (Q4 2012) stood at some £16.7bn. Of the 43,000 firms which use asset based finance 83% are SMEs (£0-5.0m t/o) with this form of finance playing an increasingly vital part in the UK’s funding landscape.

The Products

In its simplest form ABF involves companies using their unpaid receivables as a mechanism for generating instant cash. In the UK there are two well known receivables-based products; invoice discounting and factoring. Both products provide a business with the ability to draw money against its unpaid sales ledger. To do this, the financier advances an agreed percentage of the value of the sales ledger to the business, effectively using the unpaid sales invoices to secure the borrowing. Each offers an immediate availability of funds of around 80% to 85% of the invoice value, with the remainder being paid when the customer pays.

  • Factoring – provides companies with the working capital to operate their business, but with an outsourced sales ledger and collections service, plus option to transfer the risk of debtor failure to the financier. Factoring has the dual benefit of improving cash flow and reducing administration overheads. For smaller businesses it provides an excellent form of cash flow finance and a cost effective way of outsourcing credit control, freeing up management to focus on actually managing the company.

  • Invoice discountingis similar to factoring, but with companies preferring to carry out their own credit control. It provides funding together with the option to insure the debtor risk and can be provided on a confidential basis without disclosure to the debtors.

Compared to overdrafts, factoring and invoice discounting can provide significantly greater levels of funding and, being directly related to sales, the facility grows in line with the business providing increased levels of funding without the need to constantly re-arrange terms. Generally speaking, an invoice finance facility will generate far more cash, probably in the region of twice as much, than an overdraft. This gives growing businesses more access to cash and the luxury of focusing on selling and producing rather than fire-fighting cashflow issues. Knowing that the available funding tracks business growth is a huge benefit to many companies where predicting cash requirement is onerous and subject to significant fluctuation.

Asset Based Lending (ABL) is the third product offered under the ABF banner. It is when a provider lends money to an organisation against their property, plant, machinery, stock, or sometimes even their brand name. An ABL facility can often be provided in conjunction with a core receivables financing arrangement. Where invoice discounting and factoring are revolving cashflow facilities, ABL solutions offer a combination of short-term revolving cashflow and longer-term amortising debt.

ABL is generally of interest to mid-sized and larger businesses although it has been provided to businesses of all sizes. It delivers sophisticated solutions for a variety of scenarios including growth, MBOs, MBIs, mergers and acquisitions, refinancing, turnarounds, and public to private transactions (across both a European and a global arena).

Advantages of Asset Based Finance

Asset based finance is normally provided on the basis of outstanding trade debts and funding decisions are typically based on the underlying strength of a business (i.e. the products and the customers) rather than on the strength of the user’s balance sheet.

A key advantage of this finance is that ABF providers will generally have a very good relationship with the user and a real understanding of their business, allowing them to provide valuable wider business advice. This can help customers by identifying and addressing potential problems around cashflow, for instance. Asset based finance providers will consider all aspects of the business, even looking at the spread of debt and considering whether an over reliance on specific customers is threatening the business. This level of insight and added-value is not always provided with traditional forms of lending.

Accessing the Funding

The range of companies in the UK offering ABF, which includes most banks and a number of independent providers, means that pricing is competitive and risk appetites vary considerably.

The best place to start is looking at the ABFA’s website which lists all of its members, representing over 95% of asset based financiers in the UK and Ireland. On the website there is an easy to read guide to the different types of funding available. In the same section of the website there is a Funding Facility Search aimed at narrowing down the list of asset based finance members to those businesses most likely to cater for a specific funding requirement.

Alternatively a general search on the web is a good place to find a range of providers of asset based finance (Google: factoring invoice discounting, invoice finance or asset based lending).

Kate Sharp is the Chief Executive of the Asset Based Finance Association

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