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8th October 2013

Corporate LiveWire’s Virtual Round Table – Asset Based Finance 2013

Kate Sharp, CEO of the ABFA featured on CoporateLiveWire.com’s Round Table Discussion on Asset Based Finance. In addition to Kate, the panel of experts consisted of:

Click here to view the full discussion with other leading experts.

Kate’s responses are featured below:

1) Why choose asset based finance?

Asset based finance is one of the country’s most important sources of funding for both SMEs and larger companies. The latest industry figures (for quarter 2, April – June 2013) show that total funding advanced by the ABFA’s members to firms has leapt 10% year on year, the balance rising from £15.8bn to £17.4bn (June 2012 – June 2013). Sales from firms using asset based finance have also risen markedly, reaching £131.2bn in June 2013, a rise of some 12% in the past year.

Both sets of figures show that the industry has large amounts of potential funding available. It also highlights the growing need for asset based finance within the UK economy, as wider net lending fell by 3.5% in the 12 months to June 2013, marking the biggest fall in net lending since June 2012.

Compared to overdrafts and traditional forms of business funding, asset based finance products such as invoice discounting and factoring can provide businesses with significantly greater levels of funding. And, as the finance is directly related to sales, the facility grows in line with the business providing increased levels of funding without the need to constantly re-arrange terms. Generally speaking, an invoice finance facility will generate far more cash, potentially in the region of twice as much, as an overdraft. This provides growing businesses with the reassurance that they have adequate access to cash and the luxury of focusing on selling and producing rather than worrying about cashflow issues.

2) Traditionally, asset based lending funds have been utilised by asset-intensive businesses such as wholesalers, retailers, durable goods firms and companies in the oil and gas sectors that are looking to optimise their cash flows. Is this still the case or are firms with a wider variety of intangible assets now taking advantage of this method of alternative investment?

Traditionally the sector which uses asset based finance the most in the UK is recruitment, with on average 2/3rds of all staffing companies utilising factoring or invoice discounting products to support the growth stages in their lifecycle. The ABFA’s latest data shows that asset based finance is also being used extensively to support manufacturing, with over 12,600 manufacturing businesses using these types of funding. The figures show distribution, services, transport and construction sectors also drawing significantly on asset based finance products. Unlike the US where retail is a major user of asset based lending, UK legislation makes is difficult for asset based lenders to provide finance to the retail sector in the UK.

The provision of funding against intangible assets is a specialised area and is probably the most prone to changes in the economy. However, given the right circumstances asset based lenders can offer funding against a range of intangibles stretching from brand forward income streams.

3) What asset-based misconceptions currently exist?

Asset based solutions are more complex than traditional loans and overdrafts – albeit far less complex than is often perceived. There has been a misconception that additional investment in financial management systems is required, but this is rarely the case. Recent developments in IT capability now offer a range of solutions that take away the administrative burdens that used to be associated with the product making it extremely simple to use.

Another commonly held misconception is that asset based finance is primarily of use to businesses that are in difficulty. In reality asset based finance is much more commonly used by growing businesses with increasing cash flow needs. The ABFA’s latest Q2 2013 figures show both small and large companies using asset based finance, with advances to small firms (£500K – 1m t/o) recording 6.2% growth in the last quarter alone, whilst larger companies (£50m – £100m t/o) have similarly seen growth in advances of some 14.3%. This shows the clear strength of asset based finance as it suits growing companies, both large and small.

4) Have there been any recent legislative changes or interesting developments in your jurisdiction?

The UK has clearly seen significant banking reform since the start of the financial problems in 2008. This is ongoing and the ABFA is working to ensure that there are no unnecessary and unhelpful consequences on the industry arising from the changes to the banking framework. ABFA is also working with Government in areas such as the Funding For Lending scheme and the Enterprise Finance Guarantee scheme. These schemes, designed to fill funding gaps to viable SMEs, require the support of sympathetic lenders and ABFA members are engaging where they can to support the Government’s funding agenda.

The industry has also recently launched an enhanced self-regulatory framework to demonstrate the standards that clients can expect from the ABFA’s Members. The new framework covers an enhanced ABFA Code, a new independent Complaints Process overseen by Ombudsman Services and a new Professional Standards Council. Building on the core strengths of the industry, the framework makes the products more accessible and provides client businesses with even more confidence when using asset based finance.

5) Have you witnessed any prominent strategies such as revolving credit facility (“revolver”) or floor plan finance in your jurisdiction?

All asset based finance involves revolving credit facilities, so these are not prominent strategies so much as an inherent part of the industry.

One interesting development in the UK market is the growing provision of Supply Chain Finance, a mechanism where early payment of confirmed invoices alleviates the cashflow of suppliers to large corporates. This simple, elegant and inexpensive form of funding can add considerable value to a customer supplier relationship. Such schemes are changing the market, bringing in new suppliers and customers and raising awareness of the efficacy of invoice finance as a funding solution.

6) What fraud detection and prevention strategies should lenders put in place?

Any company involved in providing finance to other parties has to put in place fraud detection and prevention strategies, and the asset based finance sector is no different. Indeed, it employs some of the most robust systems available. There is increasing usage of strategic data analysis which assists providers by looking for anomalies and patterns that are indicative of fraudulent activity. By highlighting certain trading patterns the funder is alerted to potentially fraudulent activity and can take early steps to investigate in more detail. Such systems are now a key tool for the industry and have been instrumental in helping to combat fraud.

7) How does a lender determine the appropriate advance rate on eligible receivables?

It comes down to a complex combination of elements: the strength of the client, of its customer base; the quality of the goods, and the general business health of the sector all get put into the mix. “Factorability” of the goods or service provided is also key. Factorability being the term used to describe how suited the business is to invoice finance; for instance supply chains that include a proof of purchase will be considered positively. On the other hand aspects that impact of the collectability of debts such as sale or return clauses; goods with a limited shelf life or services subject to complex contractual arrangements are all less factorable these aspects do not mean funding cannot be offered but such elements will be taken into consideration when determining the advance rate of the eligible receivables.

8) To what extent is it difficult to accurately value assets for collateral purposes?

It isn’t difficult if the face value of an asset remains constant. This is why debts are the king of collateral and why invoice finance is so popular. Where the value of the asset changes with differing circumstances, it becomes much harder to accurately assess value. For example assets such things as stock have widely varying values; for a going concern stock is valued at is sale price; however many things, such a obsolescence or forced sale, exert a downward pressure on the value of stock. With plant and machinery values can also differ significantly; is it new or used, is there a distressed value to the sale, has the market recently been flooded with such items forcing prices downwards. For many such asset classes, dedicated experts are needed to accurately assess their values as collateral.

9) How has the level of due diligence on the quality of the asset increased in recent years?

It is as thorough as it always has been. The asset based finance industry has been around since the 1960s in the UK, and without effective due diligence it would not have been so successful. That said, skill levels have increased as the industry has expanded. Generally though, due diligence tends to increase in a recession and decrease in a boom simply because of the external pressures on a business. It will be less intensive where the client is financially strong and more intensive where the client is struggling for obvious reasons. What is important is that it is proportionate and ongoing.

10) How often should asset-based lenders monitor the collateral to ensure that the amount of funds being borrowed results in an acceptable loan-to-collateral value?

There is no accepted industry standard because all clients are different and it will be what it will be based on the risks involved with the facility. Ultimately it comes down to as often as is necessary!

11) Are ABL strategies affected by greater economic instabilities?

Yes, but what isn’t? That said Asset Based Finance has proven itself as a stable source of funding on both the good times and in economic downturns. The ABFA statistics are evidence of this. This is a product with inherent sensible practices and procedures that protect the lender while maximising funding to the user and as a consequence is far less prone to economic instabilities than other funding solutions.

12) What options are available to a company should they default on a payment?

That depends entirely on the circumstances. It’s in neither the funder’s nor the client’s interest to rush into winding up the facility. Obviously the funder will want to protect their investment but will always approach the situation by seeking to work with the client to bring them back to good health. Both sides want a long and profitable relationship it’s in the interest of both parties to work together and to explore every avenue to make things work.

13) What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?

The country’s economic recovery is underway. As Chancellor George Osborne said in a speech to the City on 9 September, the UK’s economy shows “signs of a balanced, broad based and sustainable recovery”. Revised GDP figures show the UK economy grew by 0.7% in the second quarter of the year, with predictions it could reach 1% for the third quarter. And last week the OECD economic agency sharply increased its growth forecast for the UK economy this year to 1.5% from an earlier estimate of 0.8%.

The ABFA expects this to continue, and indeed for the asset based finance sector to play an important part in the recovery. The latest ABFA figures show the total funding balance to be at its highest level since September 2008 and only the third time it has topped £17bn. Levels of stock held as assets have also risen by a massive 24%, suggesting that firms using asset based finance are using the increased funding to raise stock levels in line with rising consumer demand for goods.

To partner this growth the ABFA would like to see rising awareness of asset based finance as a form of funding. While the sector is performing so strongly helping over 43,000 businesses, this is only a tiny percentage of the firms which could be using it to grow their sales and to fulfil their working capital needs.