Cash Flow Kings – Asset-based lenders look to rebrand

Asset-based lenders are eager to win the trust of businesses by presenting themselves as champions of growth and allies of enterprise, but how much truth is there in the publicity?

Once associated with businesses struggling with bad debt or cash flow problems, the asset-based finance industry has strived hard in recent years to rebrand itself as a reliable source of funding for ambitious, growth-oriented companies.

With bank lending curtailed, the strategy has been paying off, and asset-based lending (ABL) has seen significant growth. Recently released statistics from the Asset Based Finance Association (ABFA) reveal that total advances are up 8 per cent over 2010 to £14.97 billion, compared to £11.18 billion five years ago.

Of total ABL advances, invoice finance makes up more than nine-tenths of the value – some £14.11 billion. Andrew Kaltz, MD of First Recruitment Services, relies on borrowing against his sales ledger to provide vital working capital for his business.

‘In an industry like ours we invoice clients every week, but we are regularly spending money and not getting anything back until the balance is settled with the client,’ says Kaltz, who may be familiar to BBC radio listeners as the “job doctor”.

In 2006 Kaltz led a management buy-out of First Recruitment, using asset-based finance to cover debts accrued through the deal. He has had an invoice finance line in place ever since, but points out that ABL isn’t always as flexible as it’s cracked up to be.

‘Things got a bit tough and our income went down, so our borrowing ability went down with it,’ he explains. ‘Although it has started to pick up in the last 12 months, the deal that we had originally struck wasn’t flexible enough for our current needs.’

The problem was that the lender placed a limit on how much First Recruitment could draw down against any one client. ‘In our business you can have periods where a big project can arise with a certain client, but we couldn’t draw down against them enough because we had a 10 per cent limit on the client,’ adds Kaltz, who subsequently switched lender to secure a more suitable package.

While the ABL industry has witnessed strong growth in the amount of money being lent, the number of clients serviced by the industry has fallen 5 per cent over the past year to 18,894.

See also: What is asset-based lending? – Funding Options CEO Conrad Ford explains asset-based lending and asset finance, and unpicks some of the terminology that lenders often use.

One company that has dropped out of the statistics is Gradwell, which supplies telephone and managed internet services to businesses. Managing director Peter Gradwell says he hasn’t been able to secure a new line of finance and believes that asset-based lending has ‘completely dried up in the last 12 months’.

‘The last deal that we were able to do via asset-based finance was about 15 months ago and since then we’ve had a couple of applications which have been rejected,’ he says.

Gradwell set up his business in his second year of university in 1998 and it has seen rapid growth, with sales now exceeding £4 million. But he believes this could be the very reason behind his recent failure to secure funding to expand his business. He explains: ‘If you are a fast-growing business and you don’t have a very strong balance sheet like us there is not a lot of security [for the lender].

The advantage of asset-based finance is the speed at which a deal can be put in place, a benefit for a company like Gradwell which needs to buy new stock to facilitate growth. ‘We’ve ended up buying most of the kit we need out of [our own] cash, which has probably slowed us down a bit,’ Gradwell observes.

ABFA’s chief executive Kate Sharp says the fall in overall client numbers may be down to smaller users of ABL ceasing to trade.

‘When you have a recessionary period, or certainly in past recessionary periods, what happens is the smaller companies are the ones that will fail,’ she argues. ‘What we will tend to see is a slight shift in our client size and we lose numbers: the smaller ones drop off and the larger ones come on.’

She points to the increase in total advances as evidence of ABL’s growing popularity, with larger companies increasingly comfortable about using asset-based facilities.

‘Our members are telling us that a year ago, clients had become very conservative about drawing down [money], despite the fact that funds were there,’ she says. ‘That’s changed: the bigger businesses are now borrowing more than they were a while ago.’

For companies that spot an acquisition opportunity, asset-based finance can be a way of getting a finance line quickly sorted. When food packaging manufacturer Discovery Foils set about acquiring stock from struggling aluminium processor Novelis, speed was essential in ensuring it didn’t lose out on the deal.

With a funding line of £3 million secured, the assets of Novelis were acquired enabling Discovery Foils to be formed. In the process, 105 jobs were saved.

‘[The deal] was impressive in terms of the speed that it was put together for what was a sizeable deal,’ says Chris Wrigley, director of Discovery Foils, which turns over £23.5 million.

In general, Wrigley is happy with his lender. ‘You have to conform to their rules, there are perhaps some bits that I feel could be a bit more flexible, but it was impressively quick. I think it gives you an opportunity that you don’t otherwise have through the banks.’

When you compare how much was advanced against various asset types between December 2009 and December 2010, one of the biggest changes is in stock finance, where advances increased 21 per cent to £366 million (see table below).

Advances by asset-based lenders at period end (£m)
Dec-09 Dec-10 % change
Pure invoice finance -advances against debt
11,545 12,605 9%
Mixed ABL facilities:
Invoices 1,498 1,509 1%
Stock 302 366 21%
Plant and machinery 60 113 88%
Property 220 182 -17%
Other assets 111 103 -7%
Other committments 168 90 -46%
Total advances 13,904 14,968 8%

Source: ABFA

However, Sharp is conservative about growth prospects for this type of lending. ‘In terms of an asset-based lend against stock there are still issues around valuation. During the recession stock levels dropped and the valuations against stock became very dodgy,’ she says.

An asset-based loan can also be secured against machinery, with advances up 88 per cent to £113 million over the past year. Managing director of FL Plastics, Geoff Fitzgerald-Lombard, secured £300,000 in asset-based finance to fund the purchase of blow-moulding equipment from a Japanese company.

Fitzgerald-Lombard explains: ‘To attempt to use other methods would have cost us more or drained our resources significantly. We needed to move quickly because in our business if you can’t supply what is required, the customer will go elsewhere.’

The old tag of “lender of last resort” is one that the ABL industry would dearly love to shake off. Sharp concedes that there is still a lingering aversion to ABL among owner-managers, but argues that negative perceptions of the industry are far removed from reality.

‘I think the problem we have in the UK is we traditionally look on asset-based finance as a product that we don’t want to engage with,’ she argues. ‘What we need to do is help people make more informed choices, and then more people would look at it not as the final option but as the first option.’

Though charges and higher interest rates make asset-based facilities more expensive than a traditional term loan from a bank, Fitzgerald-Lombard says that in his case the service proved convenient, and ‘not unduly expensive at all’. He adds, ‘It’s very straightforward, we built it into the system and the repayments just happen.’

This sentiment is echoed by Gradwell. Although he was unable to secure ABL last year, and borrowed money from RBS via the Enterprise Investment Scheme instead, he says he would like to use asset-based finance again. ‘It’s a great idea. We’ve built our business using asset-based finance.’

For the coming year, Sharp predicts that asset-based finance will continue to grow strongly. She forecasts that as the fittest companies emerge from the economic slump, their market share should increase as they gain business from their failed competitors.

‘We would expect to be in double digit growth in terms of turnover and high single digits in terms of advances, but that really depends on customer confidence and where they want to take their businesses,’ she concludes.

Nick Britton

Lexus Ernser

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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