How assets can unlock finance for expansion

Now most pan­dem­ic sup­port schemes have been wound down and infla­tion bites, many firms are find­ing work­ing cap­i­tal is tight. Cash is tighter still if they want to seize post-lock­down oppor­tu­ni­ties.

“Busi­ness­es are start­ing to sleep­walk into a cash-flow brick wall,” warns Paul Good­man, chair of the Nation­al Asso­ci­a­tion of Com­mer­cial Finance Bro­kers (NACFB) and man­ag­ing direc­tor of Good­man Cor­po­rate Finance. 

“They’ve had cash – they’ve had bounce-back loans, they’ve had CBILS [coro­n­avirus busi­ness inter­rup­tion loan scheme] – but then, all of a sud­den, they have no cash and they need to grow.”

The result is a boom in asset-based lend­ing. This includes invoice finance and equip­ment or real estate financ­ing, and is an alter­na­tive to tra­di­tion­al debt such as loans from high street banks. NACFB mem­bers helped small and medi­um-sized enter­pris­es (SMEs) raise £40.9bn of fund­ing in 2021, up from £26.7bn in 2020.

Good­man says com­pa­nies should con­sid­er asset-based lend­ing, whether they want to fuel growth or just refi­nance to make their finances robust for any future eco­nom­ic shocks.

Dispelling the myths

Mis­con­cep­tions about asset-based lend­ing, such as it’s only a source of fund­ing when all oth­er options have been exhaust­ed, are start­ing to wane.

“The myths that used to exist with asset-based lend­ing, that it’s expen­sive, it’s inflex­i­ble, it’s a last resort, they’ve all gone,” says Josh Levy, chief exec­u­tive of Ulti­mate Finance, which offers a range of fund­ing options includ­ing invoice and asset-based finance.

Assump­tions that asset-based lend­ing is com­pli­cat­ed to man­age are also out­dat­ed because tech­nol­o­gy has made the process more effi­cient, he says.

“Cloud account­ing pack­ages have helped a lot as more SMEs have become dig­i­tal­ly savvy. That allows lenders to inte­grate with them and dri­ve effi­cien­cies for every­one,” Levy says.

Anoth­er myth is that asset-based lend­ing is only suit­able for large cor­po­ra­tions. “It’s impor­tant to recog­nise this is not just for the big play­ers or mid-caps in the mil­lions of pounds of turnover; this is some­thing that’s viable much fur­ther down the food chain as well,” says Katrin Her­rling, founder and chief exec­u­tive of Fund­ing Xchange, a plat­form that helps firms find finance.

One com­pa­ny using asset-based lend­ing to sup­port expan­sion is the Mer­lin Part­ner­ship, a fast-grow­ing mak­er of fash­ion­able motor­cy­cle cloth­ing and acces­sories, based in Stafford­shire. 

Its tight con­trol over man­u­fac­tur­ing process­es means there is often a six-month gap between order­ing raw mate­ri­als and receiv­ing cash from cus­tomers, so the busi­ness quick­ly absorbs cash as it grows, says chief exec­u­tive Steven Franklin.

This prompt­ed Franklin to look at alter­na­tives to bank lend­ing to help finance the busi­ness dur­ing that long order lead time, even­tu­al­ly choos­ing a trade and invoice financ­ing mix.

The deci­sion has not only helped his busi­ness grow; when Covid-19 brought the com­pa­ny to a stand­still in ear­ly-2020, Franklin was able to nego­ti­ate a change to the facil­i­ty.

“We’ve come out of this sub­stan­tial­ly stronger than we went in,” he says, adding that asset-based lend­ing has con­tributed to the business’s strong posi­tion. 

Build personal relationships

With con­tin­u­ing eco­nom­ic uncer­tain­ty ahead – Her­rling, for instance, believes insol­ven­cy rates will start tick­ing up as gov­ern­ment sup­port ends – alter­na­tive finance remains plen­ti­ful. Fund­ing is avail­able even for com­pa­nies in finan­cial dis­tress as long as the under­ly­ing busi­ness is strong.

“Asset-based lend­ing is actu­al­ly a form of finance that will be avail­able based on your per­for­mance and the rela­tion­ships you build,” says Her­rling. “So, try to build rela­tion­ships in good times, because you can then rely on those rela­tion­ships when things get a bit hard­er.”

Per­son­al rela­tion­ships will be crit­i­cal, even as tech inno­va­tion dri­ves fur­ther effi­cien­cies. “It’s about using tech­nol­o­gy in the right way,” says Levy of Ulti­mate Finance. “It’s to enhance and enable the human rela­tion­ship to be bet­ter and more effec­tive, and to auto­mate the man­u­al bits.”

An inno­va­tion mak­ing a dif­fer­ence is the abil­i­ty to access live com­pa­ny finan­cial data, which gives lenders a more reli­able snap­shot of a busi­ness’s cur­rent sta­tus. This was par­tic­u­lar­ly valu­able amid the dis­lo­ca­tions of the pan­dem­ic.

“This helps to get per­son­alised deci­sions based on what’s hap­pen­ing in your busi­ness right now,” says Levy. “That’s where the mar­ket has helped SMEs in par­tic­u­lar in the last cou­ple of years, look­ing at data sources now to pro­vide accu­rate infor­ma­tion on what’s going on today.”

How­ev­er, a human per­spec­tive is still need­ed to make sense of the data. “It’s very dif­fi­cult to fore­cast at the moment; so many sec­tors have com­pli­cat­ing fac­tors,” says Will Wright, head of restruc­tur­ing at Inter­path Advi­so­ry. 

“What are you com­par­ing it to? Are you com­par­ing it to 2019, 2020? So to try and under­stand what busi­ness as usu­al is going to look like, and there­fore some­thing you can lend against, is incred­i­bly com­pli­cat­ed.”

As the UK econ­o­my strug­gles with mount­ing infla­tion, Brex­it teething prob­lems, the impact of the pan­dem­ic and now Russia’s war in Ukraine, com­pa­nies con­sid­er­ing rais­ing growth finance still have the option of alter­na­tive lend­ing, he says.

“At this point in the cycle, it is a good oppor­tu­ni­ty to ben­e­fit from the mar­ket being very liq­uid,” Wright says.

While the sim­plic­i­ty of an unse­cured loan may tempt some com­pa­nies, this might not pro­vide the long-term growth sup­port a busi­ness needs. Asset-based lend­ing will typ­i­cal­ly grow in line with the busi­ness; in con­trast, a short or long-term loan is sta­t­ic or may need to be rene­go­ti­at­ed. 

NACFB’s Good­man con­cludes: “If you take an invoice finance line or asset-based lend­ing-type facil­i­ty, as you grow, the facil­i­ty will grow.”