Know Your Assets
Businesses that take advantage of receivables finance in the form of factoring or invoice discounting facilities are increasingly raising cash against a wider range of asset-backed lending solutions. Alison Small explains the options
Managing the working capital cycle is a crucial aspect of running a business. Essentially, it’s a matter of ensuring that the company has the cash it requires to buy stock, pay wages, make good on tax bills and keep lights and phones running while waiting for customers to pay their bills.
For numerous small businesses – probably the majority – debt is the key to ensuring that there is sufficient cash available throughout the cycle. Unless a company can source the facilities it needs, the result can be a working capital gap and stifled growth.
That gap has been particularly acute in recent times. While High Street banks have done their best to honour existing commitments to customers, raising new money isn’t as easy as it was. In many cases, businesses cannot access sufficient working capital to deliver on their trading objectives and take advantage of new market opportunities. By extension, raising sufficient sums of money to invest in the future of the business – through expansion, acquisition, product development and so on – can be very difficult in the current climate.
Leveraging assets
But there is an answer. Businesses and their advisers don’t always realise the degree to which assets held within a company structure can be used to raise finance. What’s more, the amounts raised via assets can often be much greater than would otherwise be available through more traditional credit lines. This has led to ABL increasingly becoming an attractive option to many more businesses as awareness grows.
Furthermore this is not something exclusively for larger companies. We can provide ABL solutions for companies with revenues of £1m and above, as long as they own assets and the valuations add up in terms of their financial requirement.
A great many companies are already leveraging finance through their assets via invoice discounting or factoring facilities. Receivables finance is definitely in the mainstream and most business owners are aware that unlocking the value of their debtor books can be a valuable source of working capital.
But once you look beyond receivables into other assets – notably inventory, plant and machinery and property – new possibilities begin to open up. By borrowing against these assets, companies can raise larger sums of money and engineer a better position in which to manage their working capital cycle.
Taking stock
For a company that already has a receivables finance line in place, the next logical step is to move once step back in the working capital cycle and raise finance against inventory.
The two are closely related in that inventory creates the product that wins customers, who in turn, becomes a debtor. In terms of borrowing through the working capital cycle there is also a close relationship. Businesses that borrow against both stock and receivables have two sources of funding, each of them responsive to market demand and supplied on a revolving basis. Rising levels of trade will invariably mean higher levels of stock and more value in the debtor book, giving the business owner the opportunity to access more cash as the business grows. Equally important, inventory and receivables finance provide money at a different stage of the working capital cycle and thus provide a means to even out peaks and troughs in cashflow. For instance, a business that does most of its trade in the summer months will see the value of its debtor book rise during that season and fall at other times in the year. However, if it’s building inventory during the winter or spring, the value it holds in the warehouse means that finance will still be available.
Inventory finance won’t necessarily be available to everyone. Clearly if an ABL provider is to extend credit against stock, the items themselves must have measurable and clear value. That in turn means that they must be readily saleable. For instance, inventory branded with an end-users name will be difficult to sell to another customer and there is a danger that the goods will , therefore, be of limited value. However, if the stock is of good security value it’s value can be unlocked earlier in the working capital cycle.
Plant, machinery and property
Plant, machinery and property tend to play a different role in the corporate finance equation.
Receivables and inventory are dynamic assets. Their value rises and falls in accordance with both the trading position of the business and any cyclical variations that occur. Plant, machinery and property, on the other hand, are fixed assets. As such, ABL linked to these categories tends to provide cash for longer-term investment, rather than working capital.
Of course, businesses may often need a mixture of working capital and longer-term investment funding and one of the benefits of working with a specialist ABL provider such as ABN AMRO Commercial Finance is the ability of the lender to provide complete packages tailored to the requirements of the individual business. At ABN AMRO Commercial Finance the starting point is receivables finance, but once a company has a factoring or invoice discounting facility in place, the door is open to explore all the other ABL options.
Valuation
The key is understanding the business in conjuncture with the value of the assets. When we are approached by potential clients, our first step is to visit the business ensure we understand the dynamics of the business and only then can we make a true assessment of the value of those assets. If necessary, we instruct an external valuation expert to report to us and the business given their more in-depth knowledge.
This information and taking into consideration the ongoing value of the business enables us to arrive at the type of facility and the funding line.
As a rule of thumb, companies leveraging the value of their assets generally have more access to finance than would normally be the case through more traditional finance. Creating valuable headroom for the business. As the economy recovers, now is the time for companies to be thinking ahead in terms of their future funding and gaining financial confidence for growth. Those that haven’t considered using their business assets to leverage finance should now be exploring the possibilities.
Alison Small
Managing Director, North
alison.small@abnamrocommercialfinance.co.uk
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