Positive Planning: The New Face of Refinancing
There is now a demand for a new kind of “progressive” refinancing. As Steve Websdale explains, a renewed focus on medium and longer term strategy is changing the way businesses are looking at funding
Britain’s businesses are once again looking to the future. As the economy picks up, managers who just a few short months ago might have been focusing exclusively on the day-to-day realities of keeping their companies viable are increasingly thinking in terms of medium and even long-term objectives.
This can only be a good thing. No one can blame businesses for battening down the hatches during hard times, but if companies are to post the growth that is absolutely essential for the prosperity of the country as a whole, then it is important to map out the future in terms of objectives, opportunities and a vision of where managers want the organisation to be in six months, a year or five years time.
And at Venture we are definitely seeing signs that the horizons of our clients are beginning to lengthen and the shift in their perspective from short to medium and long-term has implications for the financial requirements of the companies we service.
That has become most apparent when we examine the reason why businesses are refinancing. As things stand, refinancing accounts for around 50% of our lending volume and if we look closely at the business stories underlying this statistic it’s possible to detect a genuine change in business priorities. Three years ago companies were refinancing in response to adverse market conditions. Today, refinancing is just as likely to be triggered by market opportunities or a forward looking assessment of cashflow, costs and economic conditions. In other words, businesses are beginning to look at their financial requirements proactively rather than reactively.
Thinking Ahead
While no one would claim that the upturn has been robust, many businesses see real opportunities ahead. That’s partly because the downturn produced winners and losers. Certain businesses went to the wall or watched their market shares drop dramatically, while others capitalised on their rivals’ shortcomings. As the recovery kicks in, the companies that have emerged from the recession in a strengthened position (relative to their competitors) have an opportunity to grow rapidly. This creates a funding requirement and we are seeing increasing numbers of companies coming to us for refinancing packages that will enable them the headroom they need to expand either organically or by acquisition.
Smart companies are considering their finance requirements through the prism of the macro-economic backdrop to the recovery. One of the by-products of the global upturn has been a steep rise in inflation. The price of oil and raw materials has been on the rise – driven by a combination of demand from emerging economies and renewed activity in the western industrialised countries. This is feeding through to higher costs for virtually every business. Thus, as businesses see trade increasing, the cashflow squeeze that often occurs when businesses spend up front to secure future revenues could be exacerbated by inflationary pressures. Again, this creates a case for progressive refinancing and forward thinking businesses are ensuring they have the financial wherewithal to cope the impact of rising prices.
In some cases, businesses are refinancing in preparation for events that are specific to their own circumstances, such as deferred considerations that will fall due in the months and years ahead.
If there’s a common factor, it’s simply this. By planning ahead and ensuring they have the right facilities in place, businesses are positioning themselves to not only survive but thrive.
The Role of ABL
ABL played a crucial role in refinancing business during and immediately after the recession and it continues to do so on the current climate where progressive finance is becoming more common.
Many businesses first explored the ABL option when it became apparent that their existing lenders were not willing or able to provide the necessary funding facilities. The ABL stayed open for business and a new generation of businesses aware of the benefits of ABL.
These benefits extended beyond availability of funding. What we’ve seen over the past few years is a growing awareness that the asset-backed model offers flexible solutions that can be tailored to individual circumstances combined with an opportunity to access levels of funding that might be unobtainable from traditional sources such as senior debt.
The route into ABL usually begins with receivable finances in the shape of either factoring or invoice discounting. Once, however, businesses look beyond receivables to the wider range of ABL – including loans backed by plant and machinery, property and inventory – they can find higher funding available. By leveraging business assets it is possible to generate more than 50% greater funding than the level available through receivables financing alone. For SMEs, the additional sums achievable – anything from £0.5m to £5m- can make a significant difference to their ability to trade successfully.
The Relationship between ABL and PE
Latterly, the growing importance of ABL has not escaped the attention of private equity funds. Traditionally, PE houses have been cautious when it comes to asset-backed lending solutions, but over the past year we’ve noted a change in their attitudes. In my experience ABL is playing a far greater role in PE-related transaction. Many fund managers have realised the extent to which funding levels can be leveraged against assets held by companies, either in their portfolios or the subject of targetted activities.
All this activity points to two things. Firstly, a change in market conditions that is, in turn, generating demand for finance. And secondly, a genuine realisation that the range of solutions offered by ABL can offer a complete refinancing solution for growth.
Further Reading:
The ABFA’s yearly statistics for asset based funding