Restoring Balance
In order to secure the finances they need in order to grow, businesses must demonstrate viability. However, this can pose problems when criteria are based solely on historic numbers. Venture’s Steve Websdale believes lenders need to give companies a more balanced consideration.
With the economy in recovery, businesses can now find some real opportunities out there. However, finding the finance needed in order to grow isn’t always easy. During the recession a great many companies suffered falls in revenue, which might have implications for their ability to borrow in the future.
Before agreeing to provide finance, lenders clearly require assurance the company in question is viable. Companies with diluted trading figures for 2008/2009 could well find it difficult to prove evidence of viability if lenders simply maintain traditional lending criteria.
In this climate, businesses requiring an increase in cashflow are rethinking their finance options, and I am seeing a move towards financiers who take a more balanced approach to assessing viability.
An improving picture
The UK economy is by no means out of the woods, but there are some encouraging signs of improvement. According to the latest figures from the Office for National Statistics, UK GDP jumped by a higher than expected 1.2% year-on-year in the second quarter of 2010, compared with growth of just 0.3% in the previous three-month period. There are all sorts of modifiers you can apply to this figure – not least the Government’s planned cuts in public spending, which have yet to work through into the overall picture for economic activity. Nevertheless, the economy looks to be moving in the right direction.
Growth offers increased opportunities. The obvious point to be made is that higher levels of economic activity mean improved overall demand. This can only mean good news. For those who survived the recession while seeing competitors fail there is the potential for double benefit: higher demand coupled with the chance to secure a greater share of the market. It’s also a good time to make acquisitions, as company valuations are relatively low.
But companies need finance if they are to take full advantage of an improving economy. Many businesses scaled back their capacity during the recession, cutting staff and reducing inventory. An improvement in demand may involve a requirement for higher stock levels and increased headcount, if companies are to meet their customers’ expectations. While M&A activity is relatively quiet at present, I expect the pace of transactions to increase as the recovery gains pace. Again, this will increase the demand for supportive finance.
Although companies can see opportunities on the horizon many remain reluctant to add further cost to their business. A view has to be formed if the opportunities are sustainable. Having made the decision to seize the opportunity businesses require certainty their chosen financier can deliver the support they need.
There is a lot of refinancing activity going on at the moment, much of it carried out by companies frustrated with their existing financiers. Many banks are unwilling to provide further support or are only prepared to do so on the basis of higher fees and interest rates, with tighter covenants wrapped around. Meanwhile, private equity funding remains hard to get for sums under £2m and remains expensive in terms of the equity asked for by investors.
Viability
This is where the issue of viability raises its head. Financiers with a traditional outlook tend to base their lending decisions on historic numbers. As many companies have seen revenues fall during the recession they suddenly find their ability to borrow drastically constrained. The historic numbers are saying ‘lend less’ when viable companies are often saying ‘we need to borrow more’.
The focus on last year’s balance sheet, I believe, provides an unbalanced picture of the true viability of businesses that have successfully come through the downturn. Often a more balanced signifier of the true potential of a business is found not only in last year’s numbers but also in the proven, hard earned record of the management team.
Not all companies suffered equally during the recession. Some have been in market segments that remained largely untouched. Others have taken advantage of competitor failures, having managed to grow their business in tough times. For a great many companies survival has been justly earned. Their managers have taken tough decisions when and where they were needed. Tight control of costs and disciplined cashflow management have often been key.
A balanced view
I am seeing businesses seeking positive choices. Those capable Owners and Managers that took decisive action are increasingly aware of new commercial opportunities that have emerged. What they’re looking for is a financier who will take a balanced view of a company and help it move forward in a sustainable way. These factors are leading increasing numbers of companies to take advantage of Invoice and Asset Based Lending solutions.
The advantage of ABL is that it allows businesses to use the value of assets – from debtor books to inventory, right through the full range of fixed assets – in order to access finance. ABL optimizes cash generation and can provide higher levels of cash headroom than some other sources.
Equally important, ABL lenders look at the performance of the management team, not just the balance sheet. This is core to our philosophy at Venture. By viewing EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) in conjunction with other factors, providers such as Venture are keen to support strong management. This tangible support comes through the provision of extra finance required for a profitable future. This support, in turn, helps generates further confidence. The offer is truly supportive finance, enabling companies to emerge positively from the experiences of an economic downturn.
As such, ABL is set to play a key role in the recovery, providing a positive option for businesses that require finance to deliver on their growth plans.
Steve Websdale
Managing Director - South
steve.websdale@venture-finance.co.uk
CASE STUDY
Michelmersh: The Viability obstacle
Having toughed out the recession, Michelmersh Brick Holdings PLC took advantage of an acquisition opportunity, financed by Asset Backed Lending. AIM-listed Michelmersh Brick Holdings PLC manufactures and sells hand and machine-made clay-facing bricks and roof tiles and operates an inert landfill site in Telford. Like many companies supplying the construction sector, Michelmersh saw its revenues fall during the recession.
However, the company successfully weathered the downturn and earlier this year it had the opportunity to increase market share through the acquisition of a rival, Freshfield Lane Brickworks. Following the recession, this was a bold move and finance was required at a time of continuing uncertainty over the willingness of lenders to provide support. However, Michelmersh had previously secured a £5.5m Receivables and Inventory Finance package from Venture.
When the acquisition opportunity arose, in addition to securing £3m equity funding the company made a positive choice to access ABL funding, with Venture as their first port of call. In May 2010, Venture agreed to provide a Confidential Invoice Discounting facility up to £1.5m and £300k in Inventory Finance. As Steve Websdale observes, the finance package provided to Michelmersh enabled them to fulfil their ambitious growth plans. “The company had made a really positive acquisition,“ says Steve. “We were able to provide them with the headroom they needed to take full advantage of their growth potential.”