Asset-based lending can provide the cashflow boost required for business expansion

Martyn Freshwater, regional director for Lloyds TSB Commercial Finance in the West Midlands

Birmingham’s economy is showing signs of growth post-recession, with many businesses spotting improved expansion opportunities, regardless of sector and size.

Asset based lending, which enables businesses to leverage both their current and fixed assets is increasingly being used by companies at all stages of their growth cycle to boost working capital and release funds for this expansion.

How does it work?

Asset based lending, incorporating invoice finance through factoring or confidential invoice discounting, payroll finance and stock and plant machinery funding, has established itself as a core component of the range of finance options available.

By leveraging the value of a firm’s assets and invoices, this dynamic product set can quickly inject liquidity to support a business’ expansion, sustain day-to-day activity or support a company during a refinance.

Funding for start-ups and SMEs

It is vital that smaller and new companies secure funding that will fully support their ambitions.

For start-ups, invoice finance is often utilised in order to capitalise on initial and unexpected demand, as it is based on issued bills and does not require a year’s accounts to leverage against.

Invoice finance, which includes factoring and confidential invoice discounting, can release the value of issued bills within 24 hours of a firm raising them, bridging the gap between issuing an invoice and receiving customer payment.

The more trading success a business enjoys, the more funding can be released against the value of its issued invoices, which can subsequently be re-invested for growth.

For smaller firms, factoring mandates the provider to perform a credit management function to chase unpaid bills, freeing up administrative time which can be spent improving operations, customer service or actively exploring expansion opportunities.

PE and ABL

ABL is increasingly being used as part of the private equity funding mix, as it strongly complements equity funding and other types of debt in these deal structures when the target company has significant tangible assets.

By working in conjunction with the corporate finance community, ABL syndicates can be formed which generate significant funding to help push deals over the line. As part of the overall capital structure, it can offer a tailored solution for companies and transactions of all sizes, from domestic mid-market businesses to large multinationals with cross-border requirements. And it is this scalability and adaptability that makes ABL so appealing in this context.

For example, the management team and private equity house can unlock funding from a range of varying assets, including plant, machinery, receivables and stock. In addition, for a multinational company, this finance can be raised against assets based in varying geographical regions, providing the funder has the requisite international reach.

The future

At Lloyds TSB Commercial Finance, we have enjoyed a successful start to 2011, having increased advances available to our customers by over £3 billion at the end of Q2, compared to the same period in 2010.

As the economy gradually recovers, we expect the number of advances and uptake of asset based lending to continue to increase, as management teams put in place long-term strategies to capitalise on growth opportunities.