With many traditional lenders prioritising issuing Government-backed loans and cutting back on non-emergency lending in the process, growing businesses have been left with limited funding options.
In this article, we explore how Invoice Discounting (ID) and Asset Based Lending (ABL) can be used as alternative funding options for businesses looking to grow, looking at what both options involve, and what are the pros and cons of each.
Growing businesses that sell either services or goods by issuing invoices should be able to access either:
ID – funding against invoices as soon as they are raised frees up cash to fund trading, rather than having to wait for debtors to pay
ABL – this allows the business to obtain funding which is secured against invoices, but also other assets such as stock, plant & machinery, property and, in some cases, intellectual property such as brands, royalties and licenses
A major benefit of both an ID or ABL facility is that, often, it can offer the business greater flexibility than a loan from traditional lenders, particularly for businesses which are growing fast – such as when rebounding from lockdown.
ID allows businesses to convert an invoice into cash on the same day, accelerating the working capital cycle that so often causes businesses cash flow problems. An ABL facility allows loans to be secured against specific assets, often at a cheaper price than an overdraft or a revolving credit facility.
Funding provided by an ID or ABL facility can increase quickly if the turnover of the business increases, whereas banks, in many cases, will only increase lending once a business has seen its profit rise. Additionally, as ID and ABL lenders have a good understanding and regular updates on the asset values, the loan can often be at a higher Loan To Value, allowing the business to borrow more than a bank would usually lend, releasing much-needed extra cash into the business.
Matters to look out for when considering an ID or ABL facility
The revolving nature of ID or ABL funding means that if sales fall, cash needs to be found to pay off the debt. It is, therefore, essential to undertake good financial planning and timely, accurate management accounting to identify and resolve any cash flow issue as quickly as possible. Most lenders will be happy to support a borrower through short term difficulties provided they are kept informed and given reasonable notice that a short-term cash issue has arisen.
Similarly, intra-month swings in working capital can cause issues for businesses operating under either an ABL or ID facility. Businesses need to ensure they understand their cash cycle so that if, for example, suppliers and employees are paid in the third week of the month and invoices are issued in the last week of the month, the phasing of receipts and payments is well mapped out and managed.
Businesses must also be aware that not all assets will be eligible for funding under either an ABL or ID facility. Many ID lenders will not provide immediate funding for any new customers whilst some current or intangible assets may also not be eligible for funding.
The service fees that some ABL and ID lenders charge also need to be taken into account. Directors need to make sure they look beyond the headline discount interest rate and understand the full cost of the funding facility presented to them.
This is where a debt advisor can help you. They can help you explore and compare all the potential funding options available to your business, assess the true cost of each option and how they will impact on your cash flow. An advisor can also help you build in a sensible buffer so the business has scope for any bumps in the road that may come further down the line.
Having an advisor on board can also help you identify which funders offer the most appropriate solutions to your business’ specific needs and aims. Finally, a debt advisor can ensure that the legal documentation is properly explained, and requires the lender to deliver fully on the agreed facility or highlight clearly any changes the lender is seeking to make in the final agreement.
ACP Cadence Advisory is part of ACP, a leading independent debt advisory association for SME and mid-market companies, advising clients on the options available to them and providing hands on support from day one all the way through to drawdown.
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