Traditionally sitting just outside the mainstream, asset-based lending is on the rise, increasingly enabling ambitious firms to invest in everything from new premises to export opportunities. Now is the time for greater clarity on why you should consider it, how it can benefit business and who has the most to gain.
The funding you need is closer than you think
The reason asset-based lending is so widely used amongst sectors such as manufacturing, engineering and wholesalers is that these companies are asset rich with often a lot of highly valuable property and equipment and have huge amounts of collateral against which to borrow. This results in a low cost way to boost cash flow and invest in valuable new business opportunities.
However, the misconception that asset-based lending is only available to those with large quantities of physical assets is potentially damaging to other businesses which sit outside this bracket. The greatest asset of them all is held in your accounts department not in the warehouse or factory.
Assets dont need to be as obvious as premises, vehicles or heavy equipment they can be as simple as a bulging sales ledger. Too often I hear of company directors borrowing against personal property, even their family home, when the company assets alone could have provided more than enough collateral to secure funds at a good rate.
Responsive benefits to give you an agile advantage
Any growing business in need of capital may have a lot to gain from asset-based lending, not least from the cost of funding, which compares very favourably with other funding options. But the advantages dont stop there. If change is in the air, with either major transformation, or smaller peaks and troughs through the year, then borrowers can benefit from the unique flexibility of this form of funding.
Businesses experiencing strong growth are a prime example. When reinvesting surplus cash back into the firm, theres often very little flexibility in the short term to increase the level of working capital required. Using asset-based lending as the assets increase, so does the funding, this means that working capital automatically adjusts to match the sales performance of the business, whether through seasonal highs and lows or rapid growth.
Its a level of flexibility thats hard to achieve through most funding sources and one which isnt restricted to domestic operations or trading alone. Asset-based lending can have enormous cross-border benefits, whether it’s exporting to a customer overseas or a wish to align multi-local operations within a pan-European group. The world is getting smaller, and asset-based lending can enable a smooth and seamless joined up approach.
Speed is also of vital importance in most funding situations. When a company needs working capital, it often needs it quickly, to provide a timely boost that allows it to meet orders, deliver its services and maximise opportunities. In fact, the asset-based lending model is designed predominantly as a short-term solution, to provide the financing companies need, when each need it. The flexibility of it means that structured working capital finance can be uniquely packaged much faster than a traditional business loan or overdraft.
Another advantage of asset-based lending is particularly relevant when looking to expand either organically or through an M&A strategy, when most traditional lenders are wary of committing funds without a proven track record of commercial viability.
Then the alternative to mainstream funding channels sits between attracting investor interest, and adopting a secured form of funding against assets. Choosing it in this situation provides a more holistic approach to funding intrinsically linked to the value of any new business or assets gained by the acquisition, whilst avoiding the need to give away equity. In this way, a successful expansion will be continually supported as it grows, providing ongoing working capital and headroom required to survive the often difficult post transitional phase.
Finance thats easier and faster to access
The decreased appetite for business lending from the banks, coupled with the impact of Basel III, has meant the search for accessible 3 finance will increasingly turn to viable and trusted alternatives.The focus on current assets of a business and leveraging on these assets can often provide funding lines in excess of other, more traditional forms of finance, which often focus more on the profitability and cash flow of the business. This enables faster decisions to be made without lengthy and onerous covenants and personal guarantees to be constructed.
Compared to the other conventional finance, with new Basel III banking treaties and their impact on the utilisation of bank capital, the asset-based lending cost of funding lines are now competitive with overdraft rates and can be less by between one and two per cent. Where costs vary beyond this depends on the level of service, and therefore fee, required.
Understanding why, when and how asset-based lending can offer an advantage is the first step in helping more businesses to achieve objectives of secure, sustainable growth.
Peter Ewen is managing director at asset-based lender ABN AMRO Commercial Finance.