James Hester regional director in South West & Wales discusses business finance

A very brief overview of what the main types of bank finance for business are: I take these to be “vanilla” overdrafts; ABL, revolving credit facilities, leveraged loans, and mezzanine finance. If there are any I’ve left please let me know.

“An overdraft is the most common form of business lending and often sits alongside more complex forms of funding to support a business’ growth or bolster working capital in the short-term.

“Asset based finance, which encompasses invoice finance, asset finance and asset based lending, has established itself as a core component of the range of funding 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.

“Revolving lines of credit are used for operating purposes and are often utilised by firms with fluctuating liquidity due to annual peaks and troughs in demand. The bank agrees a maximum amount which can be loaned to the customer, which is then used to keep cashflow stable.

“Leveraged loans are often used to fund management buy-outs of other companies and carry higher interest rates than normal bank loans. Mezzanine finance is a fusion of equity and debt which is often utilised to fund the expansion of a business.”

How common are each of these: I’m working on the assumption that almost every business has some overdraft facility, but I’d be interested to see the popularity of the others.

“Asset based finance has continued to grow in popularity over the last 10 years and is now widely regarded as a mainstream form of finance.

“According to the latest Asset Based Finance Association’s (ABFA) figures, invoice finance is currently out-performing all other types of business lending. The most recent figures, taken from Q1 2011, reveal that total advances from ABFA members have grown by nine per cent year on year.

“Due to the product set’s flexibility and ability to grow in-line with sales, businesses of all sizes and across all sectors are utilising asset based finance facilities to provide a cashflow boost to ease day-to-day working capital, or free up cash to capitalise on growth opportunities.

“At Lloyds TSB Commercial Finance, we work closely with the wider Lloyds Banking Group, to provide the most suitable form of finance for our clients.

“It is vital that small businesses secure funding that will fully support their ambitions - and often that can mean using a range of facilities such as overdrafts and more traditional forms of funding, which work particularly well alongside asset based finance facilities.”

Again bar vanilla overdrafts, what sort of businesses and circumstances are these types of funding best suited?

“Structured lending against inventory, such as asset based finance, requires a certain scale and level of accounting such that a typical borrower would have annual sales in excess of £2 million.

“However, companies of all sizes can and do borrow against assets such as plant and machinery or commercial premises, and there is a range of asset based finance solutions available for most enterprises, from start-ups to major corporates.”
 
How much do each of these types of finance cost?

“Asset based finance is competitively priced and broadly costs the same as an overdraft facility. For some businesses, the fact that this form of finance does not require personal assets to secure the funding is particularly attractive.”