Businesses need alternate ways to access cash
REGIONAL DIRECTOR, GE CAPITAL
ANY review of economic data at the moment will confirm that the outlook for UK business remains uncertain. That said, there is still evidence that growth is on the agenda for many businesses in London and activity in the transactions market is increasing. This includes interest from both private equity and trade buyers.
ALTERNATIVE FUNDING
The key challenge is how to fund these opportunities. Many businesses comment that bank lending remains restrictive, pricing high, with some funders also requiring high levels of personal security to support facilities. As further capital requirements are placed on the banking community, the likelihood is that receivables financing and asset based lending will continue to replace overdraft and term debt lending. Some of this additional lending will, no doubt, be provided by non-bank owned funders such as GE Capital and other independents in the market.
GE Capital is a provider of asset based lending (ABL) facilities, which can be used to meet a variety of funding requirements. These include organic growth opportunities; as well as transactions such as management buy-outs (MBO), management buy-ins (MBI), mergers and acquisitions, re-finances, turnarounds and restructures.
RECEIVABLES FINANCING
Receivables financing – or invoice discounting – is for most providers the core component of an asset based lending facility. The product provides a business with a revolving funding line, secured against the outstanding sales invoices owed to that business by its customers at any given point in time. Often, a businesses can expect to receive an advance of up to 90 per cent of the value of their outstanding invoices once the goods or services have been dispatched to the customer, with the remaining balance, less charges, being paid upon receipt of funds from the customer.
Flexibility is a key benefit of receivables financing. As the customer’s revenues grow, the amount generated by the facility may also increase in line with the sales ledger. This moderates the need for regular requests for increased facilities. In addition, the facility is revolving so it can potentially improve the cash position of the business versus a term debt structure where regular amortising payments are required. This can be of particular importance in structuring a transaction, especially where a business has not had a large debt burden in the past.
Some funders, including GE Capital, can provide facilities where the business has large concentrations into one or two key customers, or where a high degree of funding against exports is required. Funding can also be provided in many currencies, thus providing a natural hedge against purchases in a currency other than sterling. Many also provide credit protection against bad debts which, in the current climate, is an important factor to consider.
In addition to receivables, asset based lenders like GE will also provide facilities against other balance sheet assets such as inventory, plant and machinery and property. This enables the asset-based lending (ABL) facility to compete with traditional overdraft and term debt, and in many cases provide significantly higher levels of funding.
For transactional opportunities, the assets of the target company can be used to generate all or part of the purchase price.
BUILDING BUSINESS RELATIONS
Businesses recently seeking re-finance with GE Capital have also identified the importance of relationships. We are more than just a finance provider; we are also seeking long-term relationships through our partnership approach. Stability, flexibility and confidence from a businesses funder are an important part of decision making, as some certainty is sought in an uncertain world.
We can expect to see ABL facilities used as many companies begin to restructure over the next 12 months, some through mergers and acquisitions and others through formal insolvency processes, as debt structures created in the boom years simply cannot be sustained in what is otherwise a fundamentally sound business.
GE Capital is seeing more businesses turn to invoice finance and asset based lending facilities as a real alternative to the facilities traditionally provided by bank owned funders. With more businesses coming to us with requests to help support their growth aspirations, in particular where existing working capital requirements are not being met by current facilities.
We also see a number of businesses who are no longer happy with their existing financier relationships and are seeking the different approach we give. In the first six months of 2011 we have completed deals with total funding made available of £345m. As the economy continues to improve, it is imperative that alternative funding options are open to businesses to help fulfill their needs.
Alan Austin can be contacted at [email protected].