Interview with James Hester, Regional Director for the South West and Wales

What’s driving the market? Is it growing acceptance of ABL or the fact that “vanilla” debt has been hard to access over the past few years? Is it push or pull?

“Asset based finance, which includes asset based lending and invoice finance, has established itself over the past few years as a mainstream financial instrument, both complementing traditional forms of funding and as an alternative.

“The product set’s flexibility and speed is one of the reasons it has become a popular choice for many businesses. Start-ups keen to capitalise on initial expansion are now driving the market for these products, as well as established firms needing cash flow to maintain profitability and implement growth strategies.”

What’s the core market? Although ABL lenders claim they can deal with almost any sized business what’s the typically-sized customer and what’s a typical amount lent? Over what period do these relationships typically last?

“Usually structured lending against inventory 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 other assets such as plant and machinery or commercial premises, and there is a range of invoice finance solutions available for most enterprises from start-up to major corporate.”

One of the great selling points of ABL is that capacity can increase, particularly against sales book. But is there a counter problem that it can fall with falling sales – ie the facility reduces just when a business needs it?

“Before entering into a working relationship with a customer we perform careful due diligence to minimise the risk that if sales do fall, the business is not adversely affected.

“We also review customers’ facilities regularly to ensure they are appropriate and in line with how the firm is performing financially.”

Which types of businesses are particularly suited to ABL and which are not? For example it is claimed construction, which works on staged payments, isn’t really suited nor are businesses with few hard assets, such as design agencies.

“ABL can suit the needs of many businesses, regardless of size and sector. Here at Lloyds TSB Commercial Finance we look at all types of contractual debt, provided that the length and terms of the contract meet our criteria.

“Businesses with few hard assets, such as machinery and other equipment, can utilise factoring and invoice discounting to free up cash flow.

“These facilities release up to 90 per cent of the value of issued invoices, which can bridge the gap between raising an invoice and receiving the cash.”

Pros and Cons of ABL

“The biggest advantage in implementing an ABL facility is its elasticity and speed, ensuring firms which recognise a gap in the market or rising demand can quickly capitalise on this with a quick cash flow boost.

“The availability of invoice finance funding can increase as soon as a business starts to grow because of its dynamic link to its performance. This ensures a company is not restricted by how much it can borrow.

“Factoring, a form of invoice finance, is also ideal for smaller businesses as it has an in-built debt management function which frees up a considerable amount of administration time. This is seen by many SMEs as an important benefit.

“However, it is essential for firms to tread carefully when choosing a funding partner, as chasing invoices is a sensitive matter and need to be dealt with professionally. It is vital that companies choose a well established and highly regarded finance provider in order to protect the firm’s reputation.”