Asset-based Lending Opportunities for UK Corporates

Arguably, 2009 can be termed the ‘year of survival’ for many UK businesses, with cost cutting, optimising resources, deferring investment decisions and shoring up balance sheets high on the agenda. The aftermath of the financial crisis, the uncertainty of an economy in recession underpinned with changes in the socio-political environment, have necessitated a shift in focus for businesses. While the survival mentality of 2008/09 continues, businesses in 2010 have begun to re-address the decisions they deferred in the last year, bringing the focus on accelerating growth in an uncertain world to the top of the agenda.

A new study from GE Capital has revealed that nearly one in five (18%) established small or medium-sized enterprises (SMEs) across the UK have lost, on average, £822,000 of additional sales due to the lack of financial resources available to these businesses over the past year.

Considering the magnitude of the opportunities that UK business could lose out on due to a lack of funding, it is more important than ever that businesses and their advisers are aware of, and consider alternative forms of finance, such as invoice discounting and asset-based lending, as a means of securing the right funding at the right cost. This is not only the case for SMEs, but extends to corporates of all sizes across the UK.

Asset-based Lending

The term asset-based lending, for many, means the provision of invoice discounting facilities, i.e. a revolving funding line secured against the sales invoices that a company has owing to it by its customers at any given point in time. Once the goods have been dispatched to the customer, businesses can expect to be advanced up to 85% of the value of their outstanding invoices, with the remaining balance, less charges, being paid upon receipt of funds from the customer. Some funders can also provide credit protection to help their client mitigate the risk of not being paid by their customer, something that is proving more important as the economy starts to pick up. In addition, some funders are prepared to consider providing facilities where the business is heavily concentrated into one or two key customers, or where a high degree of funding against exports is required. Now that the long-awaited export-led recovery shows signs of at last arriving, the weakness of sterling against the euro and the US dollar should provide excellent opportunities for UK firms to maximise their export potential.

Two other key reasons why invoice discounting is expected to be the product of choice for many as they enter a period of growth are that, unlike overdraft facilities, they are not generally fixed in terms of quantum available, and grow in line with increased sales. Secondly, the facility is revolving, which can potentially improve the cash position of the business versus a term debt structure where monthly repayments are generally required.

Some providers of asset-based lending also have the capability to extend their product offering beyond invoice discounting to include funding against other classes of asset including plant and machinery and stock. All have a part to play for businesses who are seeking a funding package that best suits their requirements, whether a small domestic requirement, or a large, complex structured requirement.

For many SME’s, capital expenditure has been put on hold over the past 18 months as falling demand for products has resulted in sufficient production capacity. In addition, a requirement to maximise cash balances has led to many delaying some decisions, which will need to be made as the economic cycle improves. Leveraging existing plant and machinery to generate the funding for new plant and machinery is one area where asset-based lenders can potentially provide a solution. Alternatively, the provision of new lending secured against plant may provide the business with additional working capital when it needs it most.

Regional Focus

From a regional perspective, one expects to see a greater concentration of manufacturing companies in the Midlands and the north of the country and a similar concentration of services companies in the south. One of the key facets of the past 18 months for many manufacturing companies in the UK has been the requirement to reduce the level of stock held in the business as demand for product fell away, primarily to improve the working capital position of the business. While for many that demand has now started to improve again, there remains a cost around maintaining stock at sufficient levels to ensure sales targets can be met and the provision of a stock facility from an asset-based lender, often in conjunction with an invoice discounting facility, is often seen as the answer. Stock funding is often provided against raw materials and finished goods at advance rates in the region of 80% of its liquidation value and, again, tends to be on a revolving basis.

While all of the above products can be used to fund a business on a day-to-day basis, we can also expect to see asset-based lending facilities used as companies continue to restructure over the next 12 months. For some companies of all sizes, this will occur through mergers and acquisitions (M&A), for others through formal insolvency processes, as debt structures created in the boom years simply cannot be sustained in what is otherwise a fundamentally sound business.

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