News - Midlands
Awaiting payment has long been recognised as one of the key stumbling blocks that stunts the growth of many businesses in the UK. According to credit information company Experian, UK companies wait on average 57.8 days for customers to settle their bills, which can place an undue strain on creditors’ bank balances and dampen any immediate chances of raising enough capital to expand the business.
Operating costs can also hamper growth, particularly for manufacturers. According to estimates by business lobby group the Federation of Small Businesses, a typical manufacturing firm needs working capital equal to 27 per cent of its annual sales simply to finance orders and run the business on a day-to-day basis.
While overdrafts, loans and private equity are still the mainstay of most business funding, invoice finance is now catching up. Lenders typically have two main product offerings: discounting, where the provider lends money against the company’s debtor book but the company retains full credit control; and factoring, where the provider lends the money and handles all credit control and billing relationships with the company’s clients.
Simon Woodcock from Lloyds TSB Commercial Finance says that over the past ten years asset-based finance has moved to the forefront of lending for the small business market. “Traditionally, smaller businesses were using overdraft facilities just to tide them over while waiting for invoices to be settled and were losing thousands of pounds a year in the process. Invoice financing can give businesses up to 90 per cent of their sales ledger up front, which not only plugs the hole in their credit lines, but allows them to expand and buy goods and services immediately,” he says.
Industry body the Factors and Discounters Association (FDA) estimates that there are now nearly 40,000 businesses in the UK using invoice finance and these numbers continue to grow at a rapid rate. Most of those companies using invoice finance are based in the manufacturing and services sectors. FDA members injected a total of £8.5bn of funding into the small and medium-sized business sector during 2003, according to figures released by the FDA. Over the last two years, the industry has grown by over 32 per cent in terms of total client sales and the value of the industry now stands at over £117bn. The use of invoice discounting to fuel business growth rose 16 per cent last year compared to figures for 2003.
Adrian Chambers, regional managing director at Cattles Invoice Finance in Birmingham, says invoice finance has bloomed over the past ten years or so due to the fact that many of the conventional funding options used by small firms to cover operational expenses are not suited to financing large business change programmes, such as building new premises and buying industrial machinery. “Overdrafts, the mainstay of many businesses, are really designed for short periods of funding, such as a temporary shortage of cash, and are usually capped at relatively short amounts. Another serious drawback with using overdrafts is that the bank can demand instant repayment,” he says.
“Business owners want a cash injection so that in a year’s time, or whatever, they can effectively double the size of the business and increase turnover and give their company a firmer foundation in the marketplace,” says Chambers. “Owners also want to wholly retain the business that they have built up, which is why venture capital is unattractive to some managers,” he adds.
Chambers says that invoice finance providers can afford to lend so much capital because the risk of payment default is so low. They lend money against the strength of the company’s sales ledger and the credit worthiness of the company’s clients, and not against the company’s business plans, so lenders are likely to receive their total outlay even if the company goes bust.
Woodcock says that companies are opting for asset-based lending to either replace their overdraft arrangement with the bank and set up a more flexible credit arrangement to fund immediate growth, or use the money to fund either a management buyout (MBO) or an acquisition. Woodcock says his office completed 28 deals in the Midlands last year, of which 21 were MBOs and the remaining seven were acquisitions. Peter Torrance, managing director at Royal Bank of Scotland Commercial Services, says that nearly half of all MBOs in the SME sector are funded through invoice financing.
“Asset-based lending is becoming an extremely popular way for companies to raise funds quickly to fuel expansion plans. The beauty of such deals is that they are usually quick to set up, management retains control of the business, and the funding is based on the money due from an existing client base,” says Woodcock.
In fact, there have been a number of recent deals completed in the Midlands using asset-based lending over the past few months. In December 2004, Kerry Finnon and Derek Passant, two of the directors of Shropshire-based car dealership Greenhous Group, used asset-based lending to buy out the remainder of the directors who wanted to release the cash from their shares in the business. The firm employs 650 staff and has an annual turnover of £400m.
Ready-to-cook meal manufacturer Pann Krisp used asset-based finance to fund its recent MBI/MBO. The deal was led by the company’s managing director Peter Hawkins and Harry Rees and was financed through a mixture of invoice discounting and a loan secured on plant and machinery.
Andrew Durbin, a partner at Smith Cooper Corporate Finance, a division of accountancy and business advisory firm Smith Cooper, says that in the past assetbased finance deals have sometimes been seen as a last resort in terms of deal making. “In this case it was true that there were very few other options to fund the business initially,” he says.
“However, the subsequent choice of refinancing using a similar facility after achieving significant, budgeted profits in the first two years was based on the most suitable structure to allow for the growth in the business and create shareholder value.”
The growth in interest in asset-based lending is likely to lead to a shake-up in the market place, say experts. Gary Davison, regional managing director with pan-European receivables finance provider Enterprise Finance Europe in Birmingham, says that his firm is hoping to approach lending from a different perspective in terms of stretching the assets and looking to the strength and stability of longer-term cash flow. He believes this will lead to the development of the leveraged asset-based lending (ABL) market.
Davison says that there has been a jump in the number of businesses carrying out venture capital exits (both full and partial) via gearing up their balance sheets. He believes this will be a continuing trend.
“Leveraged ABL is playing an increasing role in secondary buyouts, offering a credible alternative in these situations. The revolving credit nature of the facility allows the business to fully leverage its balance sheet based on the enterprise value of those assets, at the same time ensuring sufficient cash can be retained in the business going forward to support growth and provide a solid strategic platform,” he says. “With these structures venture capitalists can exit an investment in circumstances where this may not be possible using traditional debt structures with onerous repayment schedules and covenants.”
Davison strongly refutes that ABL funding tends to be used in situations where businesses are facing particularly difficult trading conditions and operating on wafer thin margins. “This may have been the case many years ago, but ABL has come of age in terms of sophistication of product offering and professionalism of delivery and as such has become a mainstream, and often more flexible, funding alternative to traditional debt and mezzanine structures,” he says.
Davison believes that there is a move away from the traditional acquisition finance structures at the SME end of the market. “We’re seeing the development of new structures, based on an asset-backed platform, with cash flow lending providing headroom and short-term lending requirements. These structures are aimed at the quality businesses with strong management, stable financial performance and solid strategy.”
Richard Barlow, partner in the plant and machinery department at asset valuers GVA Grimley in Birmingham, is more pessimistic. He says: “From an outsider’s point of view, the market is probably over-serviced. There are too many people chasing the same work and the same deals.”
According to Barlow, there is a risk that the lenders’ market could become saturated unless companies start developing specialist products and services for niche clients. “Asset-based finance is not a particularly complex product, particularly for the lower end of the market,” says Barlow. “Essentially, a lender just has to have access to a lot of funds quickly, so there is plenty of opportunity for small finance companies to enter the market. Those players already in the market are either going to have to offer SMEs something new, stick to high cap companies, or become niche operators,” he says.
Cash up front
Awaiting payment has long been recognised as one of the key stumbling blocks that stunts the growth of many businesses in the UK. According to credit information company Experian, UK companies wait on average 57.8 days for customers to settle their bills, which can place an undue strain on creditors’ bank balances and dampen any immediate chances of raising enough capital to expand the business.Operating costs can also hamper growth, particularly for manufacturers. According to estimates by business lobby group the Federation of Small Businesses, a typical manufacturing firm needs working capital equal to 27 per cent of its annual sales simply to finance orders and run the business on a day-to-day basis.
While overdrafts, loans and private equity are still the mainstay of most business funding, invoice finance is now catching up. Lenders typically have two main product offerings: discounting, where the provider lends money against the company’s debtor book but the company retains full credit control; and factoring, where the provider lends the money and handles all credit control and billing relationships with the company’s clients.
Simon Woodcock from Lloyds TSB Commercial Finance says that over the past ten years asset-based finance has moved to the forefront of lending for the small business market. “Traditionally, smaller businesses were using overdraft facilities just to tide them over while waiting for invoices to be settled and were losing thousands of pounds a year in the process. Invoice financing can give businesses up to 90 per cent of their sales ledger up front, which not only plugs the hole in their credit lines, but allows them to expand and buy goods and services immediately,” he says.
Industry body the Factors and Discounters Association (FDA) estimates that there are now nearly 40,000 businesses in the UK using invoice finance and these numbers continue to grow at a rapid rate. Most of those companies using invoice finance are based in the manufacturing and services sectors. FDA members injected a total of £8.5bn of funding into the small and medium-sized business sector during 2003, according to figures released by the FDA. Over the last two years, the industry has grown by over 32 per cent in terms of total client sales and the value of the industry now stands at over £117bn. The use of invoice discounting to fuel business growth rose 16 per cent last year compared to figures for 2003.
Adrian Chambers, regional managing director at Cattles Invoice Finance in Birmingham, says invoice finance has bloomed over the past ten years or so due to the fact that many of the conventional funding options used by small firms to cover operational expenses are not suited to financing large business change programmes, such as building new premises and buying industrial machinery. “Overdrafts, the mainstay of many businesses, are really designed for short periods of funding, such as a temporary shortage of cash, and are usually capped at relatively short amounts. Another serious drawback with using overdrafts is that the bank can demand instant repayment,” he says.
“Business owners want a cash injection so that in a year’s time, or whatever, they can effectively double the size of the business and increase turnover and give their company a firmer foundation in the marketplace,” says Chambers. “Owners also want to wholly retain the business that they have built up, which is why venture capital is unattractive to some managers,” he adds.
Chambers says that invoice finance providers can afford to lend so much capital because the risk of payment default is so low. They lend money against the strength of the company’s sales ledger and the credit worthiness of the company’s clients, and not against the company’s business plans, so lenders are likely to receive their total outlay even if the company goes bust.
Woodcock says that companies are opting for asset-based lending to either replace their overdraft arrangement with the bank and set up a more flexible credit arrangement to fund immediate growth, or use the money to fund either a management buyout (MBO) or an acquisition. Woodcock says his office completed 28 deals in the Midlands last year, of which 21 were MBOs and the remaining seven were acquisitions. Peter Torrance, managing director at Royal Bank of Scotland Commercial Services, says that nearly half of all MBOs in the SME sector are funded through invoice financing.
“Asset-based lending is becoming an extremely popular way for companies to raise funds quickly to fuel expansion plans. The beauty of such deals is that they are usually quick to set up, management retains control of the business, and the funding is based on the money due from an existing client base,” says Woodcock.
In fact, there have been a number of recent deals completed in the Midlands using asset-based lending over the past few months. In December 2004, Kerry Finnon and Derek Passant, two of the directors of Shropshire-based car dealership Greenhous Group, used asset-based lending to buy out the remainder of the directors who wanted to release the cash from their shares in the business. The firm employs 650 staff and has an annual turnover of £400m.
Ready-to-cook meal manufacturer Pann Krisp used asset-based finance to fund its recent MBI/MBO. The deal was led by the company’s managing director Peter Hawkins and Harry Rees and was financed through a mixture of invoice discounting and a loan secured on plant and machinery.
Andrew Durbin, a partner at Smith Cooper Corporate Finance, a division of accountancy and business advisory firm Smith Cooper, says that in the past assetbased finance deals have sometimes been seen as a last resort in terms of deal making. “In this case it was true that there were very few other options to fund the business initially,” he says.
“However, the subsequent choice of refinancing using a similar facility after achieving significant, budgeted profits in the first two years was based on the most suitable structure to allow for the growth in the business and create shareholder value.”
The growth in interest in asset-based lending is likely to lead to a shake-up in the market place, say experts. Gary Davison, regional managing director with pan-European receivables finance provider Enterprise Finance Europe in Birmingham, says that his firm is hoping to approach lending from a different perspective in terms of stretching the assets and looking to the strength and stability of longer-term cash flow. He believes this will lead to the development of the leveraged asset-based lending (ABL) market.
Davison says that there has been a jump in the number of businesses carrying out venture capital exits (both full and partial) via gearing up their balance sheets. He believes this will be a continuing trend.
“Leveraged ABL is playing an increasing role in secondary buyouts, offering a credible alternative in these situations. The revolving credit nature of the facility allows the business to fully leverage its balance sheet based on the enterprise value of those assets, at the same time ensuring sufficient cash can be retained in the business going forward to support growth and provide a solid strategic platform,” he says. “With these structures venture capitalists can exit an investment in circumstances where this may not be possible using traditional debt structures with onerous repayment schedules and covenants.”
Davison strongly refutes that ABL funding tends to be used in situations where businesses are facing particularly difficult trading conditions and operating on wafer thin margins. “This may have been the case many years ago, but ABL has come of age in terms of sophistication of product offering and professionalism of delivery and as such has become a mainstream, and often more flexible, funding alternative to traditional debt and mezzanine structures,” he says.
Davison believes that there is a move away from the traditional acquisition finance structures at the SME end of the market. “We’re seeing the development of new structures, based on an asset-backed platform, with cash flow lending providing headroom and short-term lending requirements. These structures are aimed at the quality businesses with strong management, stable financial performance and solid strategy.”
Richard Barlow, partner in the plant and machinery department at asset valuers GVA Grimley in Birmingham, is more pessimistic. He says: “From an outsider’s point of view, the market is probably over-serviced. There are too many people chasing the same work and the same deals.”
According to Barlow, there is a risk that the lenders’ market could become saturated unless companies start developing specialist products and services for niche clients. “Asset-based finance is not a particularly complex product, particularly for the lower end of the market,” says Barlow. “Essentially, a lender just has to have access to a lot of funds quickly, so there is plenty of opportunity for small finance companies to enter the market. Those players already in the market are either going to have to offer SMEs something new, stick to high cap companies, or become niche operators,” he says.