A solution to the credit crunch?

Although it doesn’t sound like it, the term “asset finance” is actu­al­ly very broad. It can refer to one of two actions: bor­row­ing in order to buy an asset over time, such as a car or a piece of machin­ery, for exam­ple; or sweat­ing an asset that you already own to release some of its val­ue.

Then there is the def­i­n­i­tion of the “asset”, which could be machin­ery, prop­er­ty, motor vehi­cles or just about any­thing with a cash val­ue. Even mon­ey – in the form of invoic­es sent to trust­ed pay­ers – can be used to bor­row mon­ey under fac­tor­ing or invoice dis­count­ing.

The impor­tant com­mon ground is that there is a “thing of val­ue” upon which the loan is based, as opposed to a stan­dard loan which is offered or with­held depend­ing on the lender’s assess­ment of the borrower’s abil­i­ty to pay it back.

Tra­di­tion­al wis­dom dic­tates that this “thing” makes asset finance a good bet for lenders because they have a right to sell the asset should the bor­row­er not be able to repay mon­ey owed. It also gives com­pa­nies, like man­u­fac­tur­ers and trans­port busi­ness­es, access to one-off chunks of cash if they find them­selves falling behind on cash flow.

Bor­row­ers have access to less cash than they did five years ago against the same class of asset

But with few­er buy­ers in the mar­ket, assets are hard­er to shift and prices are com­ing down. What was rat­ed at one price ten years ago is almost cer­tain­ly rat­ed low­er today.

As Patrick Wilkins, region­al direc­tor at ABN Amro Com­mer­cial Finance, points out: “Assets like machin­ery and prop­er­ty are drop­ping in val­ue, not because these fig­ures are being plucked from the air by banks and lenders, but because there is a depressed demand from buy­ers.”

It means sale and lease-back agree­ments are hard­er to come by and deals that do hap­pen cov­er a small­er pro­por­tion of assets’ true val­ue. A con­se­quence is that bor­row­ers have access to less cash than they did five years ago against the same class of asset.

“Sale and lease-back lenders are a lot coy­er than they were before the cred­it crunch,” explains Tracey Ewen, man­ag­ing direc­tor of IGF Group, which spe­cialis­es in fac­tor­ing and invoice dis­count­ing. “In the reces­sion val­ues came down and some lenders realised they had over-lent for the new eco­nom­ic envi­ron­ment.

“Since then lenders are con­cerned about lend­ing more than an asset is worth, so while you might have got £8,000 for some­thing worth £10,000 then, now it would be more like £5,000 or £6,000. It’s the same thing that hap­pened with 100 per cent mort­gages, which are fine when the mar­ket is going up, but not when it’s com­ing down.”

Fred Craw­ley, edi­tor of Leas­ing Life and Motor Finance pub­li­ca­tions, agrees that there has been “a fun­da­men­tal shift in recent years”, even though the mar­ket is still strong. “Fun­ders are focus­ing on the ser­vice­abil­i­ty of the asset finance and so the under­ly­ing finan­cial strength of the cor­po­rate, rather than the poten­tial re-sale val­ue on pos­ses­sion,” he says.

Since the cred­it crunch lenders have put a lot more thought into whether bor­row­ers can pay back, even if there is an asset mit­i­gat­ing the risk of a loss. The tougher lend­ing envi­ron­ment and drop­ping assets prices mean asset-backed prod­ucts are look­ing more and more like stan­dard loans in the way risk is cal­cu­lat­ed.

How­ev­er, the news is not all bad. Accord­ing to Tom Mac­Don­ald, finan­cial ser­vices part­ner at Deloitte, the tight­en­ing of lend­ing cri­te­ria is far from uni­form and, both the like­li­hood of achiev­ing a deal and the val­ue of the deal, depend great­ly on the asset at stake and the solid­i­ty of the busi­ness apply­ing for the loan.

“Resid­ual val­ues tend to behave in cycles that are very much spe­cif­ic to the asset class,” he says. “For exam­ple from a vehi­cle finance per­spec­tive, the reduced num­ber of new vehi­cle reg­is­tra­tions dur­ing the ear­li­er peri­ods of the cred­it crunch has in some months con­strict­ed the sup­ply of sec­ond-hand vehi­cles, which has lim­it­ed the down­side risk in terms of asset prices.”

For this and oth­er rea­sons, the sta­tis­tics show asset-secured lend­ing is out­pac­ing busi­ness bank­ing. In 2011, busi­ness writ­ten by asset finance com­pa­nies in the UK was up 10 per cent on the pre­vi­ous year to £19.5 bil­lion, rep­re­sent­ing more than a quar­ter of all cap­i­tal invest­ment by UK firms. Com­mer­cial vehi­cle finance on its own was up 22 per cent to £4.4 bil­lion.

Mean­while, in the third quar­ter of 2011, mem­bers of the Asset Based Finance Asso­ci­a­tion, advanced £16 bil­lion, an annu­al rise of 9 per cent. In con­trast, lend­ing to pri­vate non-finan­cial com­pa­nies dropped 2.3 per cent in the 12 months to the end of Sep­tem­ber 2011, accord­ing to the Bank of Eng­land.

The indus­try agrees that this rise in pop­u­lar­i­ty is because of, not in spite of, the cred­it crunch. Research by Leas­ing Life mag­a­zine last month revealed that 86 per cent of asset finance busi­ness lead­ers agreed that the cur­rent increase in new busi­ness vol­umes was the result of busi­ness­es need­ing an alter­na­tive to stan­dard bank fund­ing.

Elaine Shel­ley, who runs the val­u­a­tion and advi­so­ry busi­ness devel­op­ment team at GoIn­dus­try Dove­Bid, says asset based lend­ing appears to be increas­ing part­ly because of its “prod­uct attrac­tive­ness”.

“Facil­i­ties grant­ed on the basis of his­toric infor­ma­tion will not nec­es­sar­i­ly prove flex­i­ble enough to meet the future financ­ing needs of a busi­ness as it expands, at least with­out a poten­tial­ly dis­rup­tive round of rene­go­ti­a­tion,” says Ms Shel­ley. “Over­draft facil­i­ties can also be with­drawn at any time, which can be of con­cern in the cur­rent envi­ron­ment, when busi­ness con­fi­dence is at a pre­mi­um.”

David Gri­er, a part­ner at finan­cial con­sul­tan­cy Duff & Phelps, says: “In many sit­u­a­tions asset based lend­ing is one of the few solu­tions to man­ag­ing growth and plan­ning for the future.” How­ev­er, he warns: “Any trans­ac­tion involv­ing asset based lenders is like­ly to include a deep dive into the longevi­ty of the organ­i­sa­tion, the indi­vid­u­als who are in con­trol of the sec­tor and increas­ing­ly impor­tant exit routes for the lender.”

And there’s the rub. Although asset finance seems to be an indus­try in rude health, stan­dard lend­ing rules apply. If you are plan­ning to apply for this form of fund­ing for your busi­ness, be pre­pared for due dili­gence that mir­rors any oth­er loan appli­ca­tion.

“Some lenders will accept riski­er clients since they under­write based pri­mar­i­ly on the strength of the asset’s val­ue,” says Mr Craw­ley. “But these will prob­a­bly charge a high­er rate of inter­est to cov­er default risk.

“Oth­ers, espe­cial­ly those lend­ing against ‘soft’ assets with weak resale val­ues such as small-tick­et IT or cater­ing equip­ment, will under­write based entire­ly on the strength of the customer’s bal­ance sheet.”

His advice is to be flex­i­ble and find a provider who can offer expert advice in the asset class you are buy­ing into. The chances are, espe­cial­ly with a lender that is pre­pared to put time into a deal, that a solu­tion can be found, he says.

ABN Amro’s Mr Wilkins says only busi­ness­es with cer­tain, easy to sell on, assets need to apply: “In order for busi­ness­es to increase their chances of secur­ing asset finance, I’d rec­om­mend that they care­ful­ly con­sid­er the val­ue of those assets,” he says. “For exam­ple, a bespoke piece of machin­ery, which can only be oper­at­ed by a hand­ful of trained experts, is going to raise much less than a more com­mon piece of machin­ery because there will be few­er buy­ers look­ing to pur­chase it.”

Mr Mac­Don­ald at Deloitte agrees that the asset is every­thing. “It’s an unfor­tu­nate real­i­ty that some assets deval­ue over time,” he says. “Any­one who has every bought a new car knows this all too well. Busi­ness­es should con­sid­er the saleabil­i­ty of their assets before try­ing to secure finance against them.

“In the­o­ry, rent­ing high­er qual­i­ty assets should require the lender to place less reliance on the qual­i­ty of the bor­row­ers own cred­it pro­file. Obvi­ous­ly a good track record of con­sis­tent pay­ments is also help­ful.”

For cer­tain busi­ness­es, in par­tic­u­lar those need­ing to buy or finance expen­sive kit on a reg­u­lar basis, few forms of bor­row­ing can match the asset-based vari­ety. But whether you are able to con­clude a deal or not depends on your needs, your business’s finan­cial strength and, not least, your pow­ers of per­sua­sion.

CASE STUDY

Focusing on using assets for growth

Imag­ing spe­cial­ist Har­man Tech­nol­o­gy employs 260 work­ers in Mob­ber­ley, Cheshire, and has an annu­al turnover of £26 mil­lion. It chose asset-based lend­ing to fund its plans to diver­si­fy into new appli­ca­tions and increase over­seas sales, secur­ing a £4.95-million facil­i­ty against its inven­to­ry from ABN Amro Com­mer­cial Finance.

The firm is the largest ded­i­cat­ed man­u­fac­tur­er of black and white paper and film in the world, and incor­po­rates three major brands; Ilford Pho­to, Har­man Pho­to and Kent­mere Pho­to­graph­ic which pro­duce a wide range of renowned pho­to­graph­ic prod­ucts.

Since the fund­ing it has been able to focus on oth­er aspects of its busi­ness, includ­ing thin-lay­er film and paper coat­ing for the med­ical sec­tor, and inno­v­a­tive sports prod­ucts.

The company’s 132-year expe­ri­ence in the appli­ca­tions of sil­ver, a key com­po­nent in the pho­to­graph­ic process, led to the explo­ration of this material’s anti-micro­bial prop­er­ties for use in prod­ucts such as sports­wear, plas­ters and med­ical diag­nos­tics.

“While our core busi­ness cen­tres around pho­to­graph­ic prod­ucts, our exper­tise has devel­oped over the last cen­tu­ry into a robust propo­si­tion for oth­er mar­kets where sil­ver has com­mer­cial appli­ca­tions,” says chair­man Howard Hop­wood.

“We want­ed a spe­cial­ist that could take the time to under­stand our busi­ness and cre­ate a solu­tion which allows us to lever­age against our assets, enabling us to invest in our exist­ing offer as well as expand into this excit­ing new prod­uct stream.”

Since seal­ing the deal last year, Har­man has intro­duced a new range of holo­graph­ic glass plates, cre­at­ed black and white “neg­a­tives” from dig­i­tal pic­tures, and intro­duced new pin­hole pho­tog­ra­phy tech­nol­o­gy.

The busi­ness recent­ly announced the sale of its one-thou­sandth unit of its high-per­for­mance Ilford pin­hole pho­tog­ra­phy kit, which is pop­u­lar with pro­fes­sion­al pho­tog­ra­phers and pho­tog­ra­phy stu­dents.

It has also stepped up its mar­ket­ing efforts by launch­ing a com­pe­ti­tion for pho­tog­ra­phy stu­dents with a £1,000 first prize and made its debut at the Focus on Imag­ing Exhi­bi­tion at the Birm­ing­ham NEC in Feb­ru­ary.

Peadar O’Reilly, region­al direc­tor at ABN Amro Com­mer­cial Finance, says: “Easy access to flex­i­ble finance is a vital part of this and will help build finan­cial con­fi­dence for stronger growth as well as wider eco­nom­ic recov­ery. As the UK econ­o­my recov­ers, we expect to see many more pro­gres­sive refi­nanc­ing deals as busi­ness­es refo­cus on growth.”