Asset-based Finance reassessed

With plummeting valuations and uncertainty in the markets, asset-based finance may not seem the safest option for cash-strapped companies. Marc Barber finds out more.

A number of good businesses are getting hit hard as credit insurance is withdrawn and banks steer clear of risks. If you’re a CEO in an embattled sector like retail, car manufacturing, printing or construction, you’ll be eyed by financiers with leprous suspicion as you search for funds.

Steve Websdale, the managing director of asset-based lender (ABL) Venture Structured Finance, admits that, while this is ‘a pig of a recession for many organisations’, companies with the right inventory and receivables levels, plus a sensible business plan, can quickly make a ‘material change to their level of liquidity’ if they go down the ABL path.

Identifying companies with the right profile, however, hasn’t always been as straightforward as it sounds. ‘That’s been really challenging over the past 18 months to two years,’ comments Websdale.

‘We have not been able to assist some companies because the asset base hasn’t been capable of generating the cash levels required to support the business model.’

That said, if the criteria are met, Venture can offer up to 90 per cent against receivables, 60 per cent against inventory, 80 per cent on plant and machinery and 60 per cent on property. Naturally, the concern for any CEO is the cost of the facility and whether it will actually generate cash.

‘Margins have widened a little bit, but not hugely – two over base is nearer to 2.5 over base,’ comments Websdale. ‘In terms of coping with reductions in asset cover, then obviously we’re doing valuations on fixed assets more frequently simply because of the variations that have been taking place.’

In demand

Websdale observes that more companies are enquiring about ABL facilities to supplement or replace existing sources of bank funding. ‘What we’re finding at the moment, particularly around refinancing needs, is that we have businesses that have gone to their existing bankers to seek extra facilities and the bankers don’t want to extend beyond what they’re already providing. In those top-up situations,
we can often come in and generate the additional cash flow if there is an appropriate asset base.’

While enquiries from companies are up, Websdale freely admits that business hasn’t dramatically increased as result. ‘You need a client who has a business plan that they can clearly explain to you. And if they have lost money – and let’s face it, many have – they need to be able to demonstrate what it is they have done to put the business in some form of health. We are here to help management teams to progress their business plans.’

The sweet spot in regard to company size ranges from turnover of £20 million to £150 million. ‘Most clients use a facility for between two and five years,’ reflects Websdale. ‘Genuinely, once people use ABL finance and realise it optimises cash generation for them, they stick with it.’

As for what Venture is looking for, Websdale says: ‘There should be high levels of receivables, a fair level of inventory, equity in the plant and machinery values, and there might well be a bit of property as well. Those are all generally good things for us.’

The sums released to companies can extend up to £15 million, with the funding levels reflecting the asset base. ‘We work with accountancy firms and turnaround specialists on refinancing and restructuring projects and we are always ready to listen and respond,’ adds Websdale. ‘But management teams must be prepared to take the often tough measures required to turn around an ailing company and restore it to health. They must show that they have both skill and nerve.’

Different times

It’s been necessary to understand the broader picture when dealing with clients too, says Websdale. ‘There’s nothing a client can do about a decline in fixed asset values, and there’s not much point in simply pulling the cash back because that defeats the whole purpose of a cash flow facility. We’ve had to adjust ourselves in line with diminishing asset values and get closer to clients so there is more dialogue.’

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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