Feature in the Birmingham Post by Martyn Freshwater, Regional Director in the Midlands
As the economy shows signs of recovery, many businesses are pushing forward and capitalising on growth opportunities which come their way, to great effect.
But an ambitious expansion plan needs a healthy cash flow to support it and, as many struggle to secure traditional funding, there is a risk chances to grow may fall by the wayside.
Asset based finance, which includes invoice finance and asset based lending (ABL) against stock, plant and machinery, has come to the fore in recent years not only to complement traditional loans and overdrafts, but increasingly as a stand-alone form of funding.
A working capital solution which can be adapted to fit a business’ exact specifications, asset based finance is the intelligent choice for forward-thinking firms.
Midlands and the wider world
Nationally, the economy is gradually recovering and in the Midlands, the market is relatively robust despite public sector cuts and tax increases.
The recession saw many companies look abroad to boost profit margins and increase trading opportunities. Recent predictions from the independent Office for Budget Responsibility have forecast exports over the next five years will offer the largest boost to the economy since records began.
In the asset based finance industry we are expecting to see even more firms begin to use our facilities to make the most of these overseas prospects. Invoice finance in particular, which advances the value of issued bills, is ideal as it bridges the gap caused by lengthy payment terms.
Businesses in transition
Companies wishing to implement an expansion strategy are not the only ones to benefit from asset based finance. The funding can be used to refinance a business or simply support its ongoing cash flow requirements in situations where traditional lenders may have their hands tied.
Factoring, a form of invoice finance, is also increasingly being utilised by start-ups which have experienced high levels of growth in the first couple of months.
These new businesses may have trouble accessing conventional forms of funding as their first year accounts have not yet been filed, therefore invoice finance can be vitally effective in advancing much-needed capital for expansion.
At the other end of the spectrum, these working capital solutions can also be used to assist turnarounds and phoenixes for firms which have put in place a valid and workable future strategy.
The M&A market place
When carrying out a private equity-backed transaction such as a merger or acquisition, many businesses are unable to use funding from cash reserves alone and would often prefer not to relinquish equity or take on additional senior debt.
ABL allows businesses to leverage both their current and fixed assets, including receivables, stock, plant & machinery and property, and is increasingly being used as part of the private equity funding mix. It complements equity funding and other types of debt in these deal structures when the target company has significant tangible assets.
The scalability and adaptability makes ABL appealing in this context. For example, a management team and private equity house can unlock funding from a range of varying assets. 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.
Boosting cash flow all year round
As well as start-ups and businesses which trade abroad, invoice finance is a popular choice for seasonal businesses which may find their cash flow is put under pressure by natural peaks and troughs in the market.
For example, Lloyds TSB Commercial Finance recently funded the expansion of a rapidly growing Birmingham-based business, Battery Distribution Group.
Established in 1998, the company supplies car accessory shops across the country, as well as logistics providers and commercial freight firms.
The firm has grown quickly since inception and currently employs 28 people across three warehouses in Exeter, Portsmouth and Birmingham.
Due to the seasonality of the automotive battery industry, it found it needed a funding boost to increase the amount of stock held to deal with rising customer demand in the busy winter months.
Battery Distribution Group secured a £1.5 million invoice finance facility from Lloyds TSB Commercial Finance after approaching the funder to discuss its cash flow requirements.
Now the company is in an excellent position to increase turnover to £6 million over the next year. After recently employing eight new members of staff, it also hopes to take on more people as it continues to grow.
Wayne Daniel, founder of Battery Distribution Group, is confident that the firm will continue to expand, picking up new customers and battery brands along the way.
Commenting at the time of the deal, he said: “The funding from Lloyds TSB Commercial Finance helped us maintain a strong inventory of products through the busy winter period and we are now in a fantastic position to increase our turnover by 50 per cent.”
Jon Myerscough, associate director, business development from our Midlands team who supported the deal, said at the time: “Many businesses operate in markets which experience a seasonal spike in demand and this can inevitably put strain on an otherwise healthy cash flow. Implementing an invoice finance facility is the ideal solution as it is secured against the company’s issued invoices and therefore grows in-line with sales.”
The future
Over the coming months and years the asset based finance industry will undergo changes as the economy continues to improve and businesses’ funding requirements alter.
As market leaders, it is vital that we drive this evolution and facilitate market growth as the products continue to gain popularity across the board.
In the Midlands, our established and experienced team has a clear focus on the external market and is committed to working closely with local intermediaries to ensure the region’s businesses have access to the finance they need.
May 2011