Asset Based Finance Demystified A GUIDE TO ASSET BASED FINANCE
A Guide to Asset Based Finance Overview Asset Based Finance is a generic term used to describe funding against a range of corporate assets including accounts receivable, inventory, plant and machinery, real property and sometimes even intellectual property and brands. There are two broad types of asset based finance. Invoice finance: There are two main types of funding within invoice finance: invoice discounting and factoring. With this form of funding, businesses can raise cash against unpaid invoices, enabling them to operate without having to wait for clients to settle accounts. Currently, this is the most popular form of asset based finance. If required, providers can also take on the responsibility for the settlement of the invoice for an administrative fee. There are clear differences between factoring and invoice discounting: With factoring the third party company takes control of the sales ledger, liaising with customers on settlement of invoices as well as managing the credit control of the business. They are also responsible for processing the payment of invoices, meaning that your customers are fully aware of your business contract with a factoring company. With invoice discounting your customers are unlikely to be aware of your relationship with a financing company. You maintain responsibility for the sales ledger, payment chasing and invoice processing. Asset based lending: A mix of funding including revolving and amortising structures against the entire range of business assets. Traditionally advances are available against invoices, stock, property, plant and machinery, but can be arranged against intangible assets such as brands.
A Quick Look Guide to Asset Based Finance USERS PRODUCTS Improves cashflow Provides outsourced credit control A flexible, revolving facility that matches the needs of the business Improves cashflow A flexible, revolving facility that matches the needs of the business A cashflow solution for strategic purposes, such as MBO/MBI, refinancing or rapid expansion A flexible, revolving facility that matches the needs of the business
Focus on Asset Based Finance How asset based finance can be used in different stages of a Corporate lifecycle With the passage of time, businesses go through various stages of their lifecycle, facing many challenging situations along the way. Invariably, these defining moments dictate that the business seeks finance from a third party. Asset Based Finance (ABF) provides an alternative to traditional bank financing and can flex with a business as it transitions through its lifecycles. ABF can be used extensively throughout different lifecycle stages, including working capital needs, start-up, growth, merger and acquisition, turnaround, buyouts, refinance/restructure and insolvency. WORKING CAPITAL Working capital assets are the assets available to use in a business day to day operations at any stage of a business lifecycle. In addition to supporting daily operations, working capital finance is often required to eliminate financial gaps. This funding can be secured by a number of asset types, including accounts receivables (invoices), inventory, equipment, and/ or real property. START-UP Start-up businesses need money to get off the ground; to acquire premises and furniture and equipment, R&D, professional services and to pay employees. Asset based finance can provide start-ups with a flexible source of capital. It provides fast, convenient access to the money that businesses need to meet their day-to-day cash requirements. GROWTH As a company expands, so too can its requirement for financing. As the business asset base grows, its ability to obtain finance can be bolstered. Asset based finance facilities can flex and grow with the business MERGERS/ACQUISITION To secure its future success, a business may look to acquire or merge with a strategic target. As asset based finance focuses on the value of assets held by a business, it s a particularly suitable method for financing a business merger or acquisition where fluctuating earnings and the evolving nature of the business can make other forms of financing hard to come by. BUYOUT A buyout is an investment transaction by which the ownership equity of a company, or a majority share of the equity of the company is acquired by the existing management of the company. The new owners of the business may need certainty of funding to support their broader corporate strategy. A significant number of MBOs and MBIs are financed either entirely or partly through ABF. TURNAROUND FINANCING In a turnaround scenario resources are often scarce. Turnaround financing is often used by businesses with poor performance histories that are not reaching their full potential. Once again, due to its flexibility, asset-based financing presents an ideal proposition to a business seeking to protect jobs and ensure continuity of the business. REFINANCING/RESTRUCTURING When a company enters or emerges from a growth phase, refinancing or restructuring give the business an opportunity to perhaps rationalise and consolidate their existing facilities. An asset based financier can look, not only at the businesses financial performance, but at its asset base and the day-to-day operations to tailor the facility to the situation. This type of financing is common when a business is looking at market expansion, acquisitions, restructuring operations, or after a successful turnaround. INSOLVENCY Asset-based financing is ideal in insolvency situations because of its flexibility. Asset based finance is one of the few forms of finance that is suitable for bridging the gap between businesses that must cease trading and those who turnaround and seek to retain their staff, maximise returns to creditors and ensure that suppliers experience business continuity.
Lifecycle of a business - a guide to Asset Based Finance WORKING CAPITAL: Working capital assets are the assets available to use in a business day to day operations at any stage of a business lifecycle. In addition to supporting daily operations, working capital finance is often required to eliminate financial gaps. This funding can be secured by a number of asset types, including accounts receivables (invoices), inventory, equipment, and/or real property. INSOLVENCY: Asset-based financing is ideal in insolvency situations because of its flexibility. Asset based finance is one of the few forms of finance that is suitable for bridging the gap between businesses that must cease trading and those who turnaround and seek to retain their staff, maximise returns to creditors and ensure that suppliers experience business continuity. START-UP: Start-up businesses need money to get off the ground; to acquire premises and furniture and equipment, R&D, professional services and to pay employees. Asset based finance can provide start-ups with a flexible source of capital. It provides fast, convenient access to the money that businesses need to meet their day-to-day cash requirements. REFINANCING AND RESTRUCTURING: When a company enters or emerges from a growth phase, refinancing or restructuring give the business an opportunity to perhaps rationalise and consolidate their existing facilities. An asset based financier can look, not only at the businesses financial performance, but at its asset base and the day-today operations to tailor the facility to the situation. This type of financing is common when a business is looking at market expansion, acquisitions, restructuring operations, or after a successful turnaround. GROWTH: As a company expands, so too can its requirement for financing. As the business asset base grows, its ability to obtain finance can be bolstered. Asset based finance facilities can flex and grow with the business. TURNAROUND FINANCING: In a turnaround scenario resources are often scarce. Turnaround financing is often used by businesses with poor performance histories that are not reaching their full potential. Once again, due to its flexibility, asset based financing presents an ideal proposition to a business seeking to protect jobs and ensure continuity of the business. BUYOUT: A buyout is an investment transaction by which the ownership equity of a company, or a majority share of the equity of the company is acquired by the existing management of the company. The new owners of the business may need certainty of funding to support their broader corporate strategy. A significant number of MBOs and MBIs are financed either entirely or partly through ABF. MERGERS AND AQUISITIONS: To secure its future success, a business may look to acquire or merge with a strategic target. As asset based finance focuses on the value of assets held by a business, it s a particularly suitable method for financing a business merger or acquisition where fluctuating earnings and the evolving nature of the business can make other forms of financing hard to come by.
If you would like further information on the ABFA, or our Members and their products, please contact either: Jeff Longhurst Chief Executive Officer Matthew Davies Head of Communications and Government Affairs E: jeff.longhurst@abfa.org.uk T: +44 (0)20 8334 0813 E: matthew.davies@abfa.org.uk T: +44 (0)20 8334 0816 The Asset Based Finance Association 3rd Floor, 20 Hill Rise, Richmond, Surrey TW10 6UA T: +44 (0)20 8332 9955 F: +44 (0)20 8332 2585