A roundtable discussion on how asset-based borrowing can help smaller businesses fund their sustainable growth
Now most pandemic support schemes have been wound down and inflation bites, many firms are finding working capital is tight. Cash is tighter still if they want to seize post-lockdown opportunities.
“Businesses are starting to sleepwalk into a cash-flow brick wall,” warns Paul Goodman, chair of the National Association of Commercial Finance Brokers (NACFB) and managing director of Goodman Corporate Finance.
“They’ve had cash – they’ve had bounce-back loans, they’ve had CBILS [coronavirus business interruption loan scheme] – but then, all of a sudden, they have no cash and they need to grow.”
The result is a boom in asset-based lending. This includes invoice finance and equipment or real estate financing, and is an alternative to traditional debt such as loans from high street banks. NACFB members helped small and medium-sized enterprises (SMEs) raise £40.9bn of funding in 2021, up from £26.7bn in 2020.
Goodman says companies should consider asset-based lending, whether they want to fuel growth or just refinance to make their finances robust for any future economic shocks.
Dispelling the myths
Misconceptions about asset-based lending, such as it’s only a source of funding when all other options have been exhausted, are starting to wane.
“The myths that used to exist with asset-based lending, that it’s expensive, it’s inflexible, it’s a last resort, they’ve all gone,” says Josh Levy, chief executive of Ultimate Finance, which offers a range of funding options including invoice and asset-based finance.
Assumptions that asset-based lending is complicated to manage are also outdated because technology has made the process more efficient, he says.
“Cloud accounting packages have helped a lot as more SMEs have become digitally savvy. That allows lenders to integrate with them and drive efficiencies for everyone,” Levy says.
Another myth is that asset-based lending is only suitable for large corporations. “It’s important to recognise this is not just for the big players or mid-caps in the millions of pounds of turnover; this is something that’s viable much further down the food chain as well,” says Katrin Herrling, founder and chief executive of Funding Xchange, a platform that helps firms find finance.
One company using asset-based lending to support expansion is the Merlin Partnership, a fast-growing maker of fashionable motorcycle clothing and accessories, based in Staffordshire.
Its tight control over manufacturing processes means there is often a six-month gap between ordering raw materials and receiving cash from customers, so the business quickly absorbs cash as it grows, says chief executive Steven Franklin.
This prompted Franklin to look at alternatives to bank lending to help finance the business during that long order lead time, eventually choosing a trade and invoice financing mix.
The decision has not only helped his business grow; when Covid-19 brought the company to a standstill in early-2020, Franklin was able to negotiate a change to the facility.
“We’ve come out of this substantially stronger than we went in,” he says, adding that asset-based lending has contributed to the business’s strong position.
Build personal relationships
With continuing economic uncertainty ahead – Herrling, for instance, believes insolvency rates will start ticking up as government support ends – alternative finance remains plentiful. Funding is available even for companies in financial distress as long as the underlying business is strong.
“Asset-based lending is actually a form of finance that will be available based on your performance and the relationships you build,” says Herrling. “So, try to build relationships in good times, because you can then rely on those relationships when things get a bit harder.”
Personal relationships will be critical, even as tech innovation drives further efficiencies. “It’s about using technology in the right way,” says Levy of Ultimate Finance. “It’s to enhance and enable the human relationship to be better and more effective, and to automate the manual bits.”
An innovation making a difference is the ability to access live company financial data, which gives lenders a more reliable snapshot of a business’s current status. This was particularly valuable amid the dislocations of the pandemic.
“This helps to get personalised decisions based on what’s happening in your business right now,” says Levy. “That’s where the market has helped SMEs in particular in the last couple of years, looking at data sources now to provide accurate information on what’s going on today.”
However, a human perspective is still needed to make sense of the data. “It’s very difficult to forecast at the moment; so many sectors have complicating factors,” says Will Wright, head of restructuring at Interpath Advisory.
“What are you comparing it to? Are you comparing it to 2019, 2020? So to try and understand what business as usual is going to look like, and therefore something you can lend against, is incredibly complicated.”
As the UK economy struggles with mounting inflation, Brexit teething problems, the impact of the pandemic and now Russia’s war in Ukraine, companies considering raising growth finance still have the option of alternative lending, he says.
“At this point in the cycle, it is a good opportunity to benefit from the market being very liquid,” Wright says.
While the simplicity of an unsecured loan may tempt some companies, this might not provide the long-term growth support a business needs. Asset-based lending will typically grow in line with the business; in contrast, a short or long-term loan is static or may need to be renegotiated.
NACFB’s Goodman concludes: “If you take an invoice finance line or asset-based lending-type facility, as you grow, the facility will grow.”