What funding options are out there?
Outside of bank debt, venture capital firms have quite a lot of cash to invest, and we’ve seen evidence recently of businesses being bought by private equity houses where the cheque has been signed for the whole sum on the basis that the firm will sort the debt out after the deal is done.
I think the asset-based industry has come of age now. The lack of liquidity within the traditional funding sector has strengthened our position in mainstream lending rather than second or third tier. We’re also being brought into funding opportunities much earlier by the deal advisers, and we’re now being asked to help shape the deal and flag up any potential issues quite early on in the process.
What deals have you been involved with lately?
I’m based in Birmingham so quite a few deals have centred on the automotive sector. Companies in this sector have been through the mill over the last few years and have seen a rapid decline in demand, but confidence is returning.
We’ve recently provided funding for a business that manufactures automotive components. Its turnover had dropped from £40 million to £30 million during the market collapse, so it needed to make cuts to preserve the business. However, turnover was forecast to grow from £30 million back to about £34 million over the coming year, so it needed to rehire some of the people it had laid off and to invest in some new plant and machinery.
The company originally approached its incumbent bank of 50 years for additional funding, but it was declined. However, thanks to our knowledge of the sector we were able to provide additional working capital to meet the forecast demand from its customers.
Does bringing the lender in early help the deal?
I think so, because with asset-based lenders the deliverability of our offering is more certain. The biggest complaint I hear from the corporate finance community at the moment is a lack of certainty about what lenders can deliver.
We can offer certainty because we lend against specific assets, and if all things are as they are presented to us and the collateral is good, we can deliver on the deal.
Also a good asset-based lender will take the time to understand the business and its funding needs – not just for today but long term sustainability. This knowledge is vital in enabling the facility to respond in a nimble manner to fluctuations in sector trends or business performance.
Have you seen any signs of a return of genuine M&A?
There’s certainly early evidence at the smaller end of the market, but larger corporates are also looking at refinancing to bring some of their non-core assets to the market to test the appetite.
We’ve come through a survival period and there are opportunities for consolidation. The corporates I’m speaking to at the moment are no longer talking about survival, but about growth and opportunities, which bring their own challenges.
What advice would you give to companies looking to raise finance?
Prepare your information in a sensible way, work with a proper adviser and don’t try to do it yourself, and give yourself plenty of time, don’t leave it to the last minute.
Even if you don’t have to refinance for 12 months, you really should be thinking about doing something now, to prepare your business and to open up dialogue with funders. If you leave it until a few months before your deal expires you may have a problem.
My biggest concern is that corporates leave it to the last minute, thinking that they can do it themselves. If lenders get a negative impression about an opportunity because it’s ill prepared, it can be very difficult to turn that around.
Cliff Meek, Regional Director, Venture Structured Finance