Ensuring Cash Flows During Testing Times
Ensuring Cash Flows During Testing Times
Posted on 18 March 2009 by admin
The old adage of ‘cash is king’ has never been more relevant than in the current downturn where businesses need to redouble their focus on strengthening liquidity in order to consolidate trading positions.
Companies looking to mitigate future risk or even gain a competitive advantage are looking for funding packages which improve cash flow.
In this climate Asset Based Lending (ABL), which includes factoring and invoice discounting, has come to the fore due to the flexibility it offers businesses of all sizes, from SMEs to multinationals.
UNLOCKING EXISTING VALUE
By drawing on existing assets such as a firm’s sales ledger, plant, property or stock, ABL is an effective way to quickly inject funds into a business in order to provide rapid access to working capital.
It focuses the business on its working capital, ensuring it addresses issues such as reducing debtor days and maximising stock turn.
Effectively managing cashflow in this way empowers a firm to be fleet of foot. It allows management to enter new agreements safe in the knowledge that ABL will boost funds immediately and give them the breathing space to confidently move forward.
A significant benefit is that facilities are regularly reviewed and can be quickly scaled up to meet a firm’s exact requirements, enabling them to move quickly to tackle challenges or seize new opportunities.
The best ABL lenders adopt a relationship-led approach, using their experience to guide management and tailor facilities according to the individual business’ assets, trading history, current requirements and future strategy.
It’s this flexibility which has seen ABL move steadily into the mainstream finance arena over a number of years and the current economic climate has accelerated this trend.
Figures from the Asset Based Finance Association (ABFA) show that the total value of ABL advances in the UK for the four months to the end of September 2008 totalled £17.6 billion, a 15 per cent rise compared with the same period in the previous year.
PROTECTING WHAT’S YOURS
As a result of increasing concern about customer insolvency and the huge negative impact it can have on a business, an increasing number of companies are also including debtor insurance policies in their package of ABL facilities.
These agreements take the legwork out of spotting potential credit risk problems before they lead to a bad debt which also frees up management time to focus on running their business.
Crucially, they ensure firms receive payment of outstanding invoices should a customer become insolvent and protect against the full impact of a bad debt on cash flow.
DOING DEALS
Many businesses struggle to fund sizable deals through cash reserves alone and for those not wishing to take on an interest-generating loan, or release equity to a third party, ABL is an ideal solution.
It allows management to finance an acquisition by unlocking often considerable ‘hidden’ value in a firm’s existing assets.
It has proven particularly well suited to companies that have healthy balance sheets with strong sales ledgers and significant physical assets.
By leveraging value from across the asset base, ABL can provide rapid access to large scale funding, enabling management to move quickly when they spot a potential opportunity.
Providers will also work closely with a business to structure the optimum set of facilities for the deal and ABL’s flexibility allows funds to be easily ramped up, should the enlarged company require additional headroom post-transaction.
As a result, ABL has successfully established itself as an integral part of the funding landscape for buyouts, acquisitions and refinancings of all sizes and across all sectors.
WHAT TO LOOK OUT FOR
Whilst awareness of ABL and its benefits are growing, service levels can vary so there are a few key factors to consider when selecting a lender.
The best ABL lenders will not have fixed limits on the percentage of the sales ledger they advance against or limit facilities if the majority of orders come from one customer.
This is particularly important for businesses with narrow customer bases and therefore a concentration of the sales ledger.
Quality ABL providers will assess an individual business’ trading history and make a lending decision based on the confidence they have in its strategy and management’s ability to drive growth.
These are also the funders most likely to ‘stretch’ their facilities to suit the business rather than withhold funds and potentially leave it dangerously short of cash.
In a challenging economic environment, the ability to closely manage and control capital is a necessity and ABL is a proven tool to ensuring cash flows during these testing times.
Contributed by Lloyds TSB Commercial Finance:-
ABOUT LLOYDS TSB COMMERCIAL FINANCE
Since it was established 25 years ago, Lloyds TSB Commercial Finance has maintained its market-leading position and pioneered a full ABL approach. This enables clients to draw on a diverse set of assets in order to access a tailored lending solution.
Year on year we’ve increased our client advances and we’re expecting this to continue going forward despite the tough economic conditions.
We’ve also grown our international footprint by opening seven offices across Europe in the past few years in order to support complex, cross-border deals involving multinational corporates.
