Show me the money

The asset-based lending industry is now worth £173 billion as increasing numbers of companies look to ABL financiers for strategic funding.

The asset-based lending industry is now worth £173 billion as increasing numbers of companies look to ABL financiers for strategic funding.

The asset-based lending industry is now worth £173 billion as increasing numbers of companies look to ABL financiers for strategic funding.

For Alan Sutton, chief executive of local history book publisher NPI Media, the £3 million acquisition of Sutton Publishing in January 2007 was the realisation of a long-held ambition – made possible in part by asset-based lending.

“Ever since I left Alan Sutton Publishing (now Sutton Publishing) in 1993, I wanted it back,” Sutton said. “I am now back, bigger and stronger than before and this new group is a major player in the history and heritage sector.”

This was the latest step in the rapid development of Stroud-based NPI Media. The business was only established in March 2006, but will publish more than 2,000 new titles in 2007. This is largely the result of a series of acquisitions in the past year, which include Norwich-based Jarrold Publishing and the US-based The History Press Inc for undisclosed sums. Moreover, the acquisitions are forecast to push NPI’s turnover to £17 million this year.

To fund these and others that Sutton hopes to complete in the coming months, NPI recently underwent a £15 million refinancing. While £5.5 million came from private equity firm Octopus Investments, the majority was provided by asset-based lender GMAC Commercial Finance. This enabled NPI to grow, ensuring the business did not become stretched beyond its resources.

Indeed, many smaller businesses such as NPI are now using asset-based lending to make acquisitions. “When you’re looking at a high-leverage requirement, which is often the case with a merger or acquisition, then this [asset-based lending] is a perfect solution,” said Kate Sharp, CEO of the FDA, the UK trade association for the invoice finance and asset-based lending industry.

“As an individual when you buy a house, you can get a mortgage and secure it against your property. You’re using the asset to secure the funding requirement and that is perfectly true of business as well; use the assets within the company to secure the funding.”

Asset-based lending can also be important in the post-deal phase. Sharp: “When you’re talking about a merger or acquisition, you’re normally stretching your cash flow, you’re looking to dig around for all the money you can.

“[But] the purchase price you pay isn’t the end of it because then you’ve got to have cash flow… to get the thing up and running and merge it into your business or do whatever you’re going to do. If you’re looking for cash flow facilities, secure it against the cash flow assets like invoices and stock.”

Increasing scope

Its usefulness in deal making is helping to fuel the increasing take-up of asset-based lending. At the end of December 2006, the number of clients using asset-based lending exceeded 46,000 and client sales were 16% ahead of 2005 figures, making the industry worth £173 billion, according to the FDA.

Indeed, companies in an increasing range of sectors are turning to asset-based lending. While manufacturing and services clients remain the most prolific users, a more innovative and flexible approach to structuring packages has ensured it is appealing to businesses in sectors not traditionally associated with asset-based lending, such as retail and construction.

FDA members also noted increased demand for standard invoice finance products mixed with asset-based lending in 2006. Domestic factoring plus asset-based lending, and stock finance combined with asset-based lending were particularly popular.

“Some… asset-based lenders will do a deal that doesn’t include invoices, so we can move into retail, for example, where the largest percentage of the funding will be against the inventory,” Sharp said. “We are increasingly seeing other sectors coming in; we’re even dabbling in areas like construction, which traditionally were high risk for this industry.”

As asset-based lending continues to develop new offerings, Sharp is confident that the industry will maintain its growth in the coming years. “The industry is growing around 16% per annum and it’s been in double-digit figures going back to 1960 and it’s continued to grow and that’s evidence of the fact that it actually works,” she said. “Where we see it growing in the next five to 10 years is funding major corporates that’s… what the members are now aiming at.”

Marc Barber

Raven Connelly

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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