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The pros and cons of deals‚ asset based lending
Robin Goddard comments for South West Business Insider's upcoming feature - Deals: Finance options
Were being approached by an increasing number of clients who are turning to asset based lending and invoice financing for a number of reasons. Whether thates to make their numbers stack up, grab opportunities to grow or to refinance existing debt.
Historically, invoice finance has been a popular way to support businesses to grow - as the level of the aged receivables grows, funding lines increase accordingly. However, as lockdown restrictions ease and we begin to rebuild the economy, many business owners are finding themselves faced with low levels of outstanding debt, some of which may well be past its payable date.
This means theyre looking for new ways to support growth plans, which most frequently involves one - or a combination - of the following alternative finance options, each bringing with it their own pros and cons.
Asset based lending
Asset based lending (ABL) has been a mainstream of business funding for many years and is used by many UK firms for a number of purposes - from improving cash flow to helping to fund new asset purchases, financing business acquisition and shareholder exits.
ABL is a collective term used to describe the financing of a range of assets such as receivables/debtors, hard assets/plant and machinery and property and inventory. It enables a business to raise capital against the assets that are held on their balance sheet and provides SMEs with a more flexible form of funding - used individually or collectively to raise the capital required - whilst protecting their cash flow.
By financing - or re-financing - assets, SMEs can help support their cash flow, invest in their business, and assist growth. A key advantage to the lenders is having greater visibility over the assets secured - particularly in the case of invoice and asset finance, as they can maintain day-to-day client contact and the asset is used during everyday operations.
Asset finance
More commonly known as plant and machinery (P&M), asset finance can include a wide range of assets, covering everything from lathes to diggers. As with receivable funding, the lender will advance a percentage of the forced sale value of the equipment. Unlike invoice finance, however, the facility will be agreed over a period of time - ranging from 12 to 60 months - and will be repaid in equal instalments and with little monitoring required.
Supply chain finance
This funding option allows a business to fund the purchase of materials, which are then turned into inventory. These types of facilities also tend to have no ongoing commitment, so are fairly easy to arrange and can be used as and when required. The main caveats are that the businesses directors must be homeowners and be able to present a positive statement of assets and liabilities.
Trade credit insurance
Trade debtors can make up nearly half of the assets of the average small business, which means late payments pose a significant risk to cash flow. A trade credit insurance policy can help protect cash flow by securing your accounts receivable against customer defaults.
Despite credit ratings currently taking a battering, weve managed to introduce a number of credit insurance policies that have protected each clientes biggest asset in its debtor book, whilst running alongside an invoice finance line - allowing the funder to maximise their funds in use.
A key benefit of credit insurance is that it provides companies with the necessary confidence to extend additional credit lines to customers. It also enables them to enter new markets and innovate without fear of losing essential working capital.
Insuring sales ledgers - a process which is usually quick and cost-effective to arrange - can be an effective and quick way to grow a business. Both in terms of size and profitability.
Peer-to-Peer lending
Peer-to-peer (P2P) lending is one of the fastest-growing forms of alternative finance in the UK and works by simply and quickly matching borrowers with lenders via online platforms or offline brokers.
Benefits include being able to find a lender that closely suits requirements - whether borrowing small to larger amounts. Its flexibility also means that you shouldn't have to borrow more or less than you need. There's also no obligation to surrender ownership of part or all of your business, as there is with other types of finance. However, the associated costs of P2P tend to be higher than high street lenders and some invoice financiers.
Reach Commercial Finance is an independent financial brokerage with a wide range of experience in helping limited companies and corporate entities secure funding. It is part of Leonard Curtis Business Solutions Group.
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