Working capital solutions to optimise cash flow and realise growth ambitions
10 years ago, if you were to mention at a networking event that you’re considering asset based finance, you probably would have been met with blank incomprehension.
However, the way in which asset based finance is viewed by businesses has changed in recent years, says Martin Cooper, director and head of large and major corporate business at Lloyds TSB Commercial Finance.
“Asset based finance provides working capital solutions for businesses to optimise their cash flow and realise their growth ambitions,” he says. “A lot of very well run companies, from small firms to multinationals, use it in a very strategic manner. It puts them more firmly in control because it’s directly linked to what they’re trying to achieve.”
At one end of the scale, long-term customer, Stagecoach, one of the UK’s largest public transport operators, has recently utilised Lloyds TSB Commercial Finance’s hire purchase facility for the 30th year running to provide passengers with a modern, accessible and sustainable bus fleet.
This round of funding, worth £40 million, will ensure the business can continue to renew its buses and coaches, and invest in the latest technologies.
At the other, baking firm The Fabulous Bakin’ Boys also approached Lloyds TSB Commercial Finance as the company found it needed a cash flow boost to capitalise on rapid growth due to new supermarket contracts.
The firm secured a £2 million invoice discounting facility and as result of the increased capital available to invest, is set to increase turnover to £20 million this year.
The principle of asset based finance is simple enough: using all the assets on a company’s balance sheet – receivables and debtors, plant and machinery, stock inventory and property to generate working capital.
The closer an asset is to cash, the easier it is to lend against, so the core product tends to involve invoice discounting, says Cooper. The bank advances 85-90 per cent of the value of an invoice when it’s raised and hands over the remaining 10-15 per cent when the customer settles. Interest is charged on the advance, plus a service charge.
Clients can choose how much the bank actually does, from a complete factoring operation which is leveraged on issued invoices and offers an in-built debt management system to a confidential service that’s transparent to the end customer. Special options are available, such as reverse factoring (supplier finance) for large corporations, and a combined payroll and factoring service for temporary staff agencies called Recruitment Finance.
When other kinds of assets are involved, says Cooper, the finance can be directly linked to their acquisition or use. New manufacturing plant or a build-up of stock for Christmas can effectively be paid for by finance secured on the asset itself (although existing plant or stock is equally suitable for asset finance).
Most asset finance agreements run for 12 months, but Lloyds TSB Commercial Finance’s client charter allows smaller firms (up to £15 million turnover) to give just 28 days’ notice without early termination penalties.
Fully online operations make the facility easy to use and keeps all clients in full control.
Lloyds TSB Commercial Finance also supports turnaround businesses and participates in the government’s Enterprise Finance Guarantee scheme. But it’s just as likely to be asked to help finance a merger, an MBO, a new factory or expansion into new markets.
The funder works closely with the wider Lloyds Banking Group, to ensure customers are offered the most appropriate form of finance to match their needs, whether it is an asset finance facility, which allows firms to invest in expensive equipment without denting cash flow, or a loan or overdraft to drive growth and fund expansion.
“Asset based finance is a great way of fuelling growth,” says Cooper. “And, on average, our customers only borrow around 45 per cent of what’s available to them, so it’s quite wrong to suggest that asset based finance is the last resort of businesses in trouble.”
Nor is it more expensive than other forms of borrowing. A fair amount of up-front work is involved so service charges are higher than an overdraft facility, but this can be offset by lower interest rates and the benefits that come with early release of working capital.
“Businesses that take up asset based finance become very strong advocates of the product and tend to use it long-term,” Cooper concludes.