Asset FinAnce

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Asset FinAnce& leAsing12 FEBRUARY 2009

Leading the way out of the economic downturn

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Asset FinAnce & leAsing

CONTENTSBusiness needs 4-5

Start-up 6

Affect on the industry 8

Industry advice 9

Invoice finance 10

Asset based

lending 12-13

Support industries 14

Software 15

A TITLE FROM MEDIAPLANETASSET FINANCE

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tions, many for business users.But 2009 is shaping up to be an

extraordinary year. Asset finance could, if we take the right decisions, be at the core of business survival recovery. But, in the absence of a modest level of government support (already made available to other forms of finance), asset finance will not deliver the kind of economic boost it otherwise might.

Lack of government supportAt the time of writing, most govern-ment support for lending is only available to banks. Whether this is aimed at making funds available to lend, or at making it more afforda-ble to lend to businesses teetering on the edge, it isn’t available for leasing. And this is despite the fact that lea-sing is used by as many businesses as term bank loans. The obvious issue of unfairness and an unlevel playing-field isn’t the point. The real problem is that for tens or hundreds of thousands of businesses, it just isn’t realistic to switch from leasing to bank loans. The real risk - and FLA members tell me that this is already beginning to happen - is that some businesses that would normally rely on asset finance are simply unable to obtain vital new equipment.

But there is hope, and I am

optimistic. If asset finance is properly supported by the Government – and only to the same extent as other types of business finance – it will enable providers to meet their customers’ needs. We will need some tweaks to the existing government support schemes for liquidity and lending, and to the corporate tax system. The Finance and Leasing Association is in discussions with ministers and officials on how this might work.

With such support available, the asset finance industry will be ready not only to help businesses to sur-vive in the downturn by conserving cash, but also to equip themselves for the eventual recovery. There is no better way of supporting reco-very than through business invest-ment. Indeed, when we do even-

tually see some ‘green shoots of recovery’, it is new investment that will determine how quickly growth returns. Asset finance allows that investment to be paid for over its life, rather than in a lump sum up-front, and that is going to be hugely attractive to many businesses. As-set finance could end up providing more than the current 30 per cent of investment in new business equip-ment.

Growing potentialThe potential for asset finance to support businesses is already shown in sectors such as agricul-

ture, where over 40 per cent of busi-nesses use leasing or hire purchase, and manufacturing, where a third of businesses rely on asset finance. Geographically, the highest use is in Wales, the North East and the North West. And a recent study by the Open University shows that asset finance is particularly attrac-tive to growing small businesses, with five or more employees.

I am delighted to have been asked to introduce this supplement, be-cause its publication shows that the leasing industry remains determined to see its way through the difficulties in the market, and to continue provi-ding an essential service to British businesses in good times and bad.

This determination is shown by the comprehensive revision we have recently undertaken of the

FLA’s Business Finance Code, which applies to all asset finance arranged through FLA members (90 per cent of the UK market). The code – sui-tably modernised to take account of today’s markets and operating environment – ensures that the industry’s customers can rely on getting a fair deal, and clear terms and conditions.

This supplement gives a picture of what those customers can expect from this vital business sector. With the Government’s help, we can help the UK economy through its current difficulties and lay the foundations for solid growth in the years ahead.

Asset finance – leasing and hire purchase, in this case – matters. It matters because it helps businesses to invest. Over 750,000 businesses use it, as well as many parts of the public sector. Asset finance allows businesses to preserve their cash, which today can make the diffe-rence between survival and failure. It helps businesses to obtain and use the equipment they really need. And, most of all, it saves money.

In good times, the use of asset fi-nance grows, reflecting businesses’ increasing need for equipment. And in more difficult times, as busi-nesses find themselves less able to fund investment from earnings or traditional bank lending, we would expect the use of asset finance to continue to grow.

Record breaking yearThis was reflected in 2008, during which our members financed just under £30 billion of new equip-ment, a similar level to 2007, which was a record-breaking year. This is just under 30 per cent of all fixed capital invest-ment in the UK, other than real property. FLA members provided £18 billion of finance to the motor sector, and financed more than 50 per cent of all new car registra-

Introduction

“Asset finance allows businesses to preserve their cash, which today can make the difference between survival and failure”

The importance of asset financeAsset finance can be crucial to the running of a business, both in good times and in bad. Stephen Sklaroff, Director General of the Finance and Leasing Association, calls on the Government to provide the industry with greater support.

3



the use of asset finance: at 22.4 per cent, almost twice the national ave-rage of 13.4 per cent. For, although conditions in the asset finance market are difficult, it remains an exceedingly cost effective way for companies to raise cash, usually at

a lower rate than they would have to pay elsewhere.

Strong continuing demand“Overall capital demand grew until October last year, although the last quarter did see a reduction of lending in the market place,” says Jonathan Andrew, CEO, Commercial Finance Europe/Asia Pacific at Siemens Fi-nancial Services. “We are still see-ing strong continuing demand from businesses, not least because asset finance is not cancellable, as an overdraft is. It is a dependable and predictable means of financing, as long as you pay for it.”

Peter Ewen, managing director of Venture Finance plc, agrees. “The current shortage of funding is en-couraging an increasing number of businesses to turn away from tra-ditional finance such as overdrafts and business loans towards more re-sponsive and robust sources of fun-ding such as invoice and asset based lending,” he says. “Cash is king in these difficult times and invoice fi-nance allows businesses to access up to 95 per cent of the value of an in-voice, as soon as it’s raised, enabling essential cashflow certainty.”

Unfreezing your capitalIt is also a way of releasing frozen capital from a business. Accor-ding to Siemens, billions of Euros, both working capital and cash, lies “frozen” in European and US private sector businesses, with at least E409 billion of that frozen capital spent on acquiring machi-nery, rather than hiring or leasing it through a finance plan. “That would free up working capital for investment in growth strategies,” says Jonathan.

He believes that asset finance is particularly attractive for compa-nies in the current business climate because the finance can be secured against an asset, rather than judged on the obligor organisation’s cre-dit status. Given the increasingly onerous terms demanded from len-ders of more conventional types of financing such as loans and over-

As the credit crunch descends into real recession, companies in the UK have seen their borrowing costs rise sharply – where, that is, they are still able to get credit at all. According to a report by Sie-mens Financial Services, published in Septem-ber 2008, just over a quar-ter of British firms, 25.3 per cent, have seen their bor-rowing costs rise since the crisis began in the inter-national finan-cial markets in 2007, while a further 15 per cent had been told that further interest rate rises were on the way. The situation has almost certainly deteriorated since then.

The worst hit sector of the market was IT & Telecoms; conversely, however, it was also IT & Telecoms that was increasingly turning to

drafts, that can prove very advan-tageous to the borrower.

And there are huge advantages for a firm of any size to use asset fi-nance, according to Derren Sanders, head of Equipment Finance at HSBC Commercial Banking. “Instead of borrowing against the future health of the business, it is borrowing against the value of a business’s assets,” he says. “It leaves the in-trinsic value of the business intact, which means that a company can borrow against that, too.”

Smoothing the balance sheetThere are also balance sheet implica-tions. “Leasing not only frees up ca-pital at a time when the cost of funds is increasing but removes heavily depreciating assets from the balance sheet,” says Alex Baldock, mana-ging director at Lombard, the asset finance arm of The Royal Bank of Scotland Group. “This is even more

Business needs

Boycott the banks for cheaper borrowingBanks are reluctant to lend and when they do, their charges can be stratospheric, so businesses wishing to grow are increasingly making use of asset finance instead.

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Asset FinAnce & leAsingBusiness needs

important at the moment as residual values are in sharp decline, yet a leasing company takes that growing and unpredictable risk on behalf of its customers. By fixing the majo-rity of costs including maintenance an operating lease or contract hire agreement, also provides greater budgetary cer-tainty at a time of increa-sing unknowns. In addi-tion it outsources much of the basic administrative burden of managing a fleet, allowing staff to con-centrate on core business activities.”

Asset finance is split into two areas: hiring and leasing, on the one hand, and invoice financing and asset based lending on the other. The interests of the first are looked after by the Finance and Leasing Asso-ciation, and the second by the Asset Based Finance Association, and both are increasingly used by companies having trouble getting credit else-where.

“If the intrinsic business is less profitable, then the likelihood is that banks will lend less money,” says Derren Sanders. “However, a com-pany that makes use of proper asset

financing can make sure their fun-ding is till in place. Take, for exam-ple, a haulier. There are still plenty of lorries moving goods around, and if you buy a big lorry for £100,000, it will probably still be worth a lot. Ge-nerally, good and readily available

assets have not changed too much in value, but the underlying business will not be worth as much. It’s the difference between subjective and objective: the value of the business is subjective, whereas the value of the asset is objective.”

However, using asset finance also makes sense when your assets are lo-sing value. “Given that assets when you buy them immediately begin de-preciating, funding out of cash flow can make a real strain on your resour-ces,” says Alex Baldock. “The flexibi-lity of acquiring assets through asset

finance methods provides you with the use of the asset at a known budgetary cost, but with the ability to update and replace without a major call on your cash reserves. Deals can be structured for the life cycle of what the asset is needed for – for example - ‘working’

assets such as printing pres-ses, construc-tion machi-nery or ‘fixed’ assets for lon-ger life requi-rements such as premises. Payments can also be arran-

ged to be lower in non-peak customer times to be tailored to meet customer operation requirements.”

Advantages of leasingSome companies, of course, will hire or lease rather than buy. Quite apart from the availability of credit, there are cost implications, too. “Businesses choose to lease assets because it saves them money,” says Julian Rose, head of asset finance at the Finance and Leasing Association. “It is can be cheaper to lease equipment than buy outright. Compared to other

businesses, finance providers can often buy equipment for less and sell equipment when no longer needed at a better price. These benefits are reflected in the rental payments. Leasing also makes it easier for businesses to manage their cash

flow, and to upgrade equipment before it becomes obsolete. Leasing can be particularly useful for small companies that may not be able to obtain bank loans for essential equipment.” In today’s economic climate, that makes particular sense.

There is a government-run

website that highlights the

advantages of leasing and

HP: www.businesslink.gov.

uk. It highlights the various

advantages of buying outright,

leasing and HP. The first

of these options is a good

idea if you have the cash

available or if you must own

the equipment, but large

capital expenditure can

effect a company’s cash flow.

Both HP and leasing allow

a company to use an asset

over a fixed period in return

for regular payments: if you

lease a piece of equipment,

then your monthly payments,

by definition smaller than

the outlay needed to buy it

outright, frees up the money to

grow the business elsewhere.

However, you will pay more

in the longer term and you may

never own the asset, although

some arrangements allow you

to buy it at the end of the

lease. Another advantage is

that it allows you to update

equipment without paying

more.

Hire purchase, on the other

hand, means that you will own

the asset once payments have

been made, and you can claim

capital allowances against tax

from the beginning of the HP

contract. The interest rate you

pay will also probably be lower

than interest charged on a

loan or overdraft.

“Instead of borrowing against the future health of the business, it is borrowing against the value of a business’s assets”



One of the worst hit sectors in the current economic climate is that of the fledgling company: a new business, with no track record, no history and only an uncertain fu-ture at a time of national unrest, will find conventional credit hard to come by even in a normal reces-sion, let alone one in which bank lending has all but dried up. Nor are businesses that have had to re-structure themselves and start out afresh doing much better. Such is the gloom in some sectors that lack of funding is no longer a problem, because no one wants to start a new business to fund. Even the availa-bility of funding via asset finance is not proving enough of a draw.

“Certainly, we are seeing fewer start-ups at the moment,” says Peter Ewen, managing director of Venture Finance plc, which has between five and ten per cent of its business in start-ups. “Hopefully when the cre-dit crunch eases, we will see more. Traditionally, that also happens to-wards the end of a recession, when

Starting from scratchThis is not a good time to start a new company. But for those who do, asset finance can be an ideal way to grow the business, providing funding from its very first sale.

Start-ups

related is taking advantage of the sinking pound. Rimmer knows of companies that export tooth-brushes, hair care and beauty pro-ducts – some of the goods are both manufactured and sold outside the UK and never actually touch these shores, but the company itself is based in Britain – all of which are doing well. Indeed, he also sees a difference in the attrition rates of start-ups catering to the UK and the inter-national market: an export-led business has a 25 per cent better chance of survival than its counterpart that re-lies solely on the UK to pay its bills.

A better way to growBut most start-ups are fin-ding traditional funding very hard to come by. Only the best business plans will be supported by the banks and capital can be very difficult to find. However, for those companies that are making a go of it in the current economic climate, invoice finance can be one of the best ways to grow the busi-ness. “New businesses can start using their invoice finance faci-lities almost immediately – as soon as they make a sale,” says Ewen. “The business can also be quite small, starting at a turnover of £150,000 to £200,000: special products are available for that size of company. The whole point is that we are able to take a view be-cause we are funding the invoices rather than funding the business itself.”

One of the biggest problems for start-ups is bad debt, and so Ewen recommends using a factoring pro-duct with a credit insurance element. Firms like Venture can also support new businesses in other ways, too: it is a member of the Small Firm Loan Guarantee scheme, a government-backed scheme that allows viable businesses access to loans.

people who have become unemplo-yed use their redundancy payments to start out afresh.”

Not rising from the ashesEdward Rimmer, UK and Irish chief executive of Bibby Financial Ser-vices, says that conditions are very

difficult at the moment. “Traditi-onally, we’ve found start-ups are companies that are starting com-pletely afresh, or are companies that have failed in the past and after restructuring, are starting again in a different guise,” he says. “That has tailed off a lot. Banks don’t like to support phoenix busi-

nesses, as they are known: they prefer companies with a track re-cord, which is where we come in.” Indeed, Bibby has seen a 25 per cent drop in the number of phoe-nix/restart businesses it deals with and no immediate way out of the economic gloom.

The worst hit sectors, according to Rimmer, are manufacturing, followed by the service industry. Construction and recruitment have also suffered, along with printing, hauliers, wholesalers and engi-neers. However, a small number of start-ups are actually doing well at the moment: anything export or oil

However, for firms that are wil-ling to go out and find the business, opportunities are still there. Edward Rimmer says that his firm, too, is doing well. “We are not completely immune from current problems, but much more secure than the banks because even if the start-up goes out

of business, we will still get our money back,” he says. “And invoice financing can be in-valuable: I’ve seen start-ups go from sales of £100,000 in the first year to £3 million five years later. Another problem with conventional financing

is that bank loans don’t grow in line with a company’s tur-nover: at the end of

t he loan period, you have to renegotiate. That is not the case with invoice financing: the facility grows alongside the company. Ultimately, it will be SMEs that kick start the economy and many will be start-ups. This is a great opportunity for ABFA mem-bers.”

Opportunity knocksHe also sees one silver li-ning to the current dark clouds: because most people will be too con-cerned about the current economy to strike out for

themselves, there are more opportunities for those who do. As there is less competition both for the actual business and, indeed, for funding, any new company that really has spotted a gap in the market, done its homework and got a good business plan together still stands a good chance of doing well.

“But this is not the time for spe-culation,” Rimmer cautions. “A very thorough knowledge of the market you are entering is advisable first: you need to know where the market is and how to grow sales.” But the opportunities are out there for people prepared to do the legwork. In other words: fortune favours the brave.

“A small number of start-ups are actually doing well at the moment: anything export or oil related is taking advantage of the sinking pound”

Alternative Funding Available to South East SMEsSally Goodsell, CEO of Finance South East (www.financesoutheast.com) looks at the latest funding options for SMEs.

With difficult market conditions and a dearth of credit many SMEs need capital injections to maintain growth and retain jobs. At Finance South East we specialise in funding ambitious businesses and are actively looking to support more enterpri-ses with high growth potential. Our funds offer an alternative source of finance to growing companies, particularly at a time when traditional sources of credit are running dry. In fact, our Government-financed funds have recently been incre-ased to help businesses affected by the recession.

The newly established Transition Fund has been set-up in the South East speci-fically to support established SMEs who are experiencing cash-flow problems as a result of the current lack of commercial

finance. While it’s still early days, initial successes highlight how publicly-financed loans can work to help businesses through this difficult time. The Transition Fund, which is financed by SEEDA and mana-ged by Finance South East, provides up to £150,000 whilst requiring no capital or in-terest to be repaid until the end of the loan period.

The Transition Fund has recently helped Craufurd Technology Limited (CTL) take advantage of an export business opportu-nity despite tough conditions. When facing difficulties with its new export venture as the credit crunch caused financial delays for its American customer, a £100,000 Transition Fund loan allowed CTL to ge-nerate six new jobs, as well as employment for other subcontractors in Britain.

Our flagship Accelerator Fund, a mez-zanine loan fund which has been provi-ding South East businesses with alterna-tive finance since 2004, continues to offer

funding for growing SMEs with a scalea-ble business model. Bridging the gap bet-ween traditional debt and equity finance, an Accelerator loan works well in comple-menting other funding sources, such as asset finance, to create a larger funding package.

In the current economic crisis it is vital that those businesses with good prospects for growth and job creation can continue to access the funding that will enable them to progress, so it is more important than ever for us to support such enterprises. Finance South East manages a number of funds available to ambitious businesses within the SEEDA region and we are still very much open for business.

We are willing to take the risk of in-vesting in businesses that are willing to share that risk with us by taking a bold and positive approach.

Finance South East managed funds are available to ambitious businesses at va-

rying stages of growth, based within the SEEDA region:

• Accelerator Fund: a £10m mezzanine loan fund providing SMEs with an inno-vative source of finance of up to £200,000, for a range of growth activities• South East Seed Fund: a £5m equity fund investing up to £250,000 on a matched-funding basis to SMEs, including univer-sity spin-ins/spin-outs• Commercialisation Fund: a £3m fund providing repayable finance of up to £60,000 for proof-of-concept and com-mercialisation activities• Transition Fund: providing loans of up to £150,000 to established SMEs • South East Capital Alliance (SECA): a business angel network introducing high quality, investment ready companies to potential investors from across the regionFor more information visit www.financesoutheast.com



changed. We still have 6,200 UK clients running businesses from £100,000 turnover to hundreds of millions and we are working in 16 countries outside the UK.”

Winning streakAnd, as the asset finance industry is so keen to emphasise, because of the way in which it provides fun-ding, business failure is nothing like as catastrophic as it could be for the banks. As long as asset finance

companies themselves can get hold of funding, and certainly on the in-voice financing side that does not appear to be a problem, they are able to grow their custom – just like the businesses they support, in fact. There will be some winners from the recession: the asset finance in-dustry looks to be one.

was also a nine per cent rise in the quarter to the end of September, to nearly £53 billion, against over £48 billion in the same quarter in 2007 and although growth is not expected to continue at quite such a rate, neit-her is it expected to fall.

Signs of optimismFigures within the industry them-selves, meanwhile, are far more op-timistic. “The industry is moving as we expected, based on previous recessions,” says Kate Sharp, chief executive office of ABFA. “We are

thriving as providers of alternative f i n a nc e : people go to the bank

first and when they have

been turned down, they ap-proach us. When the first tier closes, the second opens. We expect the in-dustry to continue to grow.”

Of course, asset financiers are less at risk if a business fails than banks, because they are lending against the assets of the business, not the business itself. Sharp also cautions that more clients of the industry will be failing over the coming months and so asset finan-ciers will have to work harder for available business. But her tone is not one of concern.

Funding outside the UKJustin Floyd, chairman and chief executive of the online software and

hardware leasing specialist smart-fundit.com, is also bullish. “There is plenty of demand out there,” he says. “And while leasing companies that are owned by banks are strugg-ling, especially in the UK, we have a large funding network outside the UK, mainly in Europe and the Uni-ted States, which means we can meet that demand.” He points out that many companies are also struggling because they took at loan arrange-

ments two or three years ago with banks at unrealistically low rates and now can’t replace them, which means that they are looking to their company assets to free up capital.

Steve Box, managing director of HSBC Invoice Finance, says that his firm is also very much open for business, even if it is being a little more cautious as to whom it will take on. “Usually, a recession is a good time for factoring companies,” he confirms. “Of course, the level

of insolvencies is going up, and we do have to consider carefully if a business is likely to fail. The retail sector is coming under a great deal of pressure, with household names like Woolworths failing, and even those that survive are ordering less stock. But for clients of good standing, our credit stance hasn’t

The credit crunch has had an ef-fect on the asset finance industry, as it has on every other part of the financial markets, and there have certainly been some tales of doom and gloom. Towards the end of last year, ING Lease Deutschland clo-sed down its forfeiting business, Universal Leasing wound down its Europe-wide leasing arm and BMW temporarily suspended new business at Alphera, its point of sale funding arm for non-BMW ve-hicles, and Alphabet, its fleet ma-nagement and leasing company.

And yet the picture for asset fi-nanciers is by no means as gloomy as elsewhere, especially in the other side of the industry. According to the Asset Based Finance Association (ABFA), in the 12 months to the end of September 2008, the last period for which figures are available, the in-dustry had advanced over £154 bil-lion in domestic factoring, domestic invoice discounting, export factoring, ex-port invoice discounting and import factoring, up 10 per cent from the previous year’s f igu re of just over £140 billion. The only one of those areas to show any de-cline was domestic factoring. There

Affect on the industry

The state of the marketAlthough some leasing and hire purchase companies are finding the current climate challenging, many asset finance providers are saying there has never been a better time to lend.

“We are thriving as providers of alternative finance: people go to the bank first and when they have been turned down, they approach us”

9

biggest upheaval in this business for a generation. Under the new regime, cars producing more than 160g/km of CO2 will be subject to a writing-down allowance of only 10 per cent, while those producing 160g/km or less will qualify for a 20 per cent allowance. Leased cars in the higher category will have 15 per cent of the relevant payments disallowed while those in the lower category will have no disal-lowance.

This will make a massive difference. For example, a company could claim over £8500 on a sub-161g/km CO2 car - such as a 1.6-litre diesel-engined Focus - with a new value of £20,000 and 70 per cent depreciation after three years. However, if the car produced 161g/km CO2 or more only just over £4800 could be claimed. The relationship between CO2 emissions and Vehicle Excise Duty levels is also being strengthened from April, with differences of up to £250 per year on cars in the two categories.

A green vehicle policy will also save you money. In simple terms, the lower the CO2 emissions, the lo-wer its whole-life cost will be, and more than ever it is the whole-life cost - not list price or even monthly rental – which matters. Despite the premiums on list price and the cost of the fuel, dieselmodels are usu-ally more cost-effective to run than petrol equivalents as they not only produce less CO2 but their fuel eco-nomy is so superior and they have better residual values.

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Asset FinAnce & leAsingIndustry advice

Keep abreast of market develop-ments and strengthen your leasing knowledge by referring to on and off-line specialist publications such as Leasing World and Leasing Life.

Cast your net wider; don’t just look at ‘the usual large players’ for pro-spective employment. On the plus side, there are many smaller leasing companies that are faring well and

expanding despite the economy. Re-main positive and focused and you may be pleasantly surprised at the outcome.

Peter Ewen, managing director of Venture Finance plc

A business experiencing cashflow problems must align itself with an experienced and solid partner which takes the time to understand their unique needs and delivers tailored solutions. Invoice and asset based lending can offer flexible funding for turnaround situations, often pro-viding the business in question with sufficient liquidity to executive re-structuring plans.

Reducing overheads is crucial in surviving an economic downturn. Factoring is often a cost-effective option for small or start-up busi-nesses with turnovers of £100,000 plus, removing the need for in-house credit resource and allowing

businesses to focus on customer re-tention and new business.

Make sure you sleep well at night, safe in the knowledge that your busi-ness is protected. Choose a financial partner that offers bad debt protec-tion in conjunction with your invoice finance facility. This will protect and pay out against unpaid invoices due to unforeseen customer insolvency.

Alex Baldock, managing director at Lombard, the asset finance arm of The Royal Bank of Scotland Group

Understand forthcoming legisla-tion on your leasing arrangements. April’s tax changes represent the

Jane Theobald, Recruitment Director, New Leaf Search

The current economic climate has resulted in large-scale redundancies within the leasing sector. Our advice for jobseekers attempting to secure a new role such challenging times is simple.

Stay close to a reputable recruit-ment company who can keep you informed of industry trends, provide insightful career advice and present you with suitable job opportunities. Ensure they have strong credentials in the asset finance and leasing sec-tor.

If you’ve been made redundant, now is not the time to deliberate. If an opportunity arises whereby your skills match the job requirements and the employment proposition is viable, seize it! If you don’t, somebody else will. Be aware of intense competition; be decisive and quick to act.

Prepare to be flexible and realis-tic on salary expectations - but go the extra mile in presenting a qua-lity CV and preparing for interviews thoroughly. It’s vitally important that your CV is impeccable since you only have one chance to sell yourself to make the interview shortlist.

Ask the experts for tips to stay on top

“Choose a financial partner that offers bad debt protection in conjunction with your invoice finance facility.”

“It’s vitally important that your CV is impeccable since you only have one chance to sell yourself to make the interview shortlist.”

Strategic Consultancy

Systems Consultancy

Operational Consultancy

Financial Consultancy

Human Capital Solutions

Richmond Consulting Group is one of the leading providers of specialist consultancy to the finance and leasing industry. We operate globally from offices in the UK and Europe, employing only professionals with direct finance and leasing industry experience, we help our clients build a solid foundation for their business.

To find out how the Richmond Consulting Group can help your business contact us at the following:One Heddon Street, Mayfair, London, W1B 4BD

Tel: +44 (0) 20 7470 7172 Email: [email protected] Web: www.richmondgrp.com

10


the bill is paid, the client receives the outstanding 15 per cent. Sometimes the financier puts some element of bad debt protection into the service, while the charges themselves might constitute either a flat fee or a percentage of turnover: because the

client is still responsible for collecting the invoice, the fee is usually in basis points.

Factoring, which is sometimes called Full Service Factoring, is a similar way to raise money, but with additional services added in. It is especially appropriate for businesses that have slow paying customers, a shortage of working capital and might need protection against bad debt. In this case, the factor agrees to pay an agreed percentage

of approved debts as soon as they receive the invoice, usually, again, between 80 to 85 per cent. Unlike an invoice discounter, the factor will take over the administration, namely credit management and collections work, and the fee will thus be higher: typically up to three per cent of turnover.

Cutting costsAccording to Kate Sharp, chief executive officer of the Asset Based Finance Association (ABFA), outsourcing this work can be extremely cost effective for a small firm. “Take the example of a recruitment company,” she says. “You set up in a rented office with a couple of desks, sales and contracts, and have

staff who want paying at the end of every week. There is a huge gap in your cash flow, banks won’t lend to you because it’s too risky, but if you receive 85 per cent of your invoice on day two of the week and don’t have to pay it out until day six, that is covering your cash flow requirement. It works perfectly.”

Tim Corbett is the managing director of Fortis Commercial Finance Ltd and the chairman of ABFA. He points out that invoice financing gives the provider a far clearer idea of

how a business is doing than a bank offering an overdraft or loan facilities would have. “Banks look at the historic performance of a business, which means that the information released by a company’s management is going to be at least three months out of date,” he says. “It is looking backwards to fund a company going forward. However, a factor or invoice provider will see invoices on a daily basis, and can put a value on the business as it is today.”

A better way to borrowFundamentally, however, invoice financing boils down to maintai-ning the lifeblood of a company: cash flow. “One of the most impor-tant considerations for firms is to put cash flow first, profit second and turnover last,” says Martin Morrin, managing director of RBS Invoice Finance. The amount a company can raise through invoice financing as opposed to conventional borrow-ing is bigger, too: up to 85 per cent of the outstanding monies against an overdraft that would probably be a maximum of 50 per cent of what is owed. This type of financing also

Invoice finance is a highly practi-cal way for companies to raise cash, particularly in the current economic climate. According to research car-ried out by HSBC Commercial Ban-king, SMEs are being hit by a pincer movement of suppliers billing more quickly, and fewer companies paying within agreed payment terms: 18 per cent of small businesses surveyed are receiving bills faster, and 20 per cent say fewer companies are paying fast. This is a problem that can be allevia-ted by invoice financing, and yet ac-cording to HSBC, 40 per cent of the 569 SMEs surveyed are raiding their savings and nearly a quarter relying on overdrafts. This is not the best use of cash.

Flexible optionsInvoice financing involves two types of lending: invoice discounting and factoring, with about 55 factoring houses in the UK. In the first case, the client sells the company’s book of invoices to a financier for its face value and receives, typically, 80 - 85 per cent of the monies owed, less the financier’s charges. This transaction is not disclosed to the original cutsomer, but the money due goes into a bank account administered by the invoice discounter, and when

Invoice finance

an inDepenDent suppleMent froM MeDiaplanet about asset finance & leasing, DistributeD within the Daily telegraph

carries with it in-built risk manage-ment even if no factor is used, in that the invoice discounter will still bring to a company’s attention invoices that have not been paid. It can be a signal of a potential problem before it actually occurs.

“Cash is king and that is more cru-cial than ever,” says Jeff Longhurst, managing director of London-based Eurofactor. “The lack of available credit cover means that businesses need cash more than ever to pay for supplies, because their suppliers won‘t give them credit. That, in turn, is because, is because insurers won‘t provide the finance. On top of that, the price of money has gone up, again leading to a requirement for cash.”

Nor does this just apply to SMEs. “The biggest change over the last year has been the nature of the busi-ness looking for invoice finance,” Longhurst says. We are now tal-king to investment grade compa-nies, which we wouldn‘t have done a year ago. There has been a complete change of perception about factoring over the last few years: it is a product that has finally come of age.”

Fitting the billIn a sluggish economic climate, cash flow can quickly dry up. Invoice financing is an ideal way to bridge the gap between an invoice going out and payment coming in.

“Banks look at the historic performance of a business, which means that the information released by a company’s management is going to be at least three months out of date”

Truly Client-Centric Asset Based Finance Solutions “As an equity backed owner

managed commercial finance company, we are ideally positioned to help those companies which act decisively on opportunities so that they may emerge stronger and fitter. The directors of Centric Commercial Finance will continue to support firms in the tough times and the good by delivering the quantum and certainty of funding, together with the creativity and speed of response that each client’s individual business situation demands.”

tim Hawkinscentric commercial Finance

studio 4 Power Road studios 114 Power Road chiswick london W4 5PY t: +44 (0) 20 8747 2300 W: www.centriccF.com [email protected]

selling to blue-chip clients. We were looking for the best possible deal and met with Centric following a referral from another lender. Centric was very responsive and the time from enquiry to delivery was just ten days. I would have to say that Centric is in tune with the way business is conducted today. Years ago you could visit your bank manager, today you can’t get in touch with your High Street bank at all. Now, conventional banking has had its day, Centric has shown the way forward for business.”

AJ Moran - Smooth Operators

Centric provided a refinancing package for AJ Moran Ltd, a leading dry lining and plastering contractor, operating for close to 50 years. The company provides various plastering related services to housebuilders across the Thames Valley.

The senior management team is led by managing director Peter Melton, who commented: “Centric are clever guys. I felt that they worked hard to understand our business and stepped in quickly to structure a confidential invoice discounting facility that reduced

our overdraft and kept a medium term loan in place. Housebuilders are prone to hang onto cash for as long as they can in this market and consequently debtor days drift out. Centric pressed the button to offer a facility that matches our working capital needs perfectly.”

Stortext Document Solutions Limited – Scanning Success

StortextFM is one of Europe’s most successful specialist document processors, with scanning, data capture, document hosting and processing operations situated at three UK sites, enhanced by offshore facilities.

They prepare, attach bar codes and scan documents which they then host for their customers to access over the Internet.

StortextFM’s Financial Director, John Williams said: “We were referred to Centric by our venture capital investors. The confidential invoice discounting facility has enabled us to plan and manage our working capital more easily. We knew that

our service would require a more detailed understanding on behalf of the lender concerned. Centric delivered on all fronts.”

Certainty of FundingTim Hawkins, Commercial Director of Centric Commercial Finance comments: “For many businesses an economic downturn represents a challenging time: for some it will present new opportunities.”

The current market conditions have clearly made it very challenging for SME and mid-market companies to access financing. Asset Based Lending offers significantly higher levels of working capital than traditional facilities allow.

Gourmet Candy – A Sweet DealGourmet Candy offers a range of unique and exclusive product lines from St. Valentines Liquorice to Jessica Walker and Mr Stanleys. Recently, Centric structured a confidential invoice discounting facility for the fine confectionery manufacturer. Paul Hillman, managing director of Gourmet Candy, comments: “Confidential Invoice Discounting suits the profile of a growing business

G▲ Tim Hawkins



Asset based lending frees up cash with which to finance change: at its simplest, it is a loan secured by an asset, which can be anything from plant to machinery, the invoice book and even – albeit very rarely – branding. It is built for companies which need to refinance themselves, while the loan taken out typically lasts three to five years.

An ideal solution“For larger, more multi-national

corporations with capital tied up in assets, an asset based lending solution may be more appropriate,” says Kate Sharp, chief executive of the Asset Based Finance Asso-ciation. “This form of funding is increasingly available and of-fers businesses a way of releasing funds into the business, which would otherwise be inaccessible. With this type of funding an or-ganisation can unlock vast sums of cash that have been invested in a business infrastructure. Sales

The economic downturn is causing a great deal of upheaval in every market, but it is providing opportunities, as well as problems, with some companies seeing this as a time for change. And whether that dynamic is a company growing, sliding, changing ownership or management or, most pertinently, whether it is a company in the throws of a management buyout, the company needs to raise cash and this is where asset based lending can provide a solution.

Asset based lending

money that is particularly suited to classes of industry that are as-set rich, such as manufacturing and less so to an asset-light com-pany, say, in the distribution sec-tor. Except in the case of invoice financing, which works across the board, ABL also tends to be sui-ted to more established companies with assets to borrow against: a new company would not necessa-rily own outright the equipment against which it could borrow, not least as its requirement would be met through leasing or HP.

A wide application“Invoice finance is suited to in-dustries that sell on credit terms to other businesses and invoice re-trospectively,” says Sharp. “Asset based lending has a wider applica-tion and is also suitable for retail businesses. Asset based finance operates across many sectors, for example textiles, recruitment, printing, packaging, light engi-neering and manufacturing sec-tors.”

There are no hard and fast rules, but in general terms, ABL is appropriate for companies with a turn over of £2 million upwards. ABL also offers a greater degree of certainty than more conventio-nal lending, such as an overdraft, which can be withdrawn at any time, as it runs to a fixed term.

There are advantages for fi-nance companies to lend in this way, too. “If you are lending via an ABL structure, you require less capital than an unsecured or corporate loan, which means your return on capital is greater,” says Paul Beveridge, managing

growth can immediately be taken advantage of and stock and machi-nery value that would otherwise have little impact on your business finance requirements can be unlo-cked. Therefore organisations can utilise property value without sa-crificing ownership.”

Typically, a company can raise about 60 per cent of a building’s value (down from about 70 per cent a year ago) and 70 to 80 per cent of the value of plant and ma-chinery. It is a method of raising

Making the most of your assetsAs more conventional forms of borrowing are increasingly hard to come by, asset based lending is coming in to its own. Both finance providers and customers are benefitting from the trend.


Asset FinAnce & leAsingAsset based lending

director of KBC Business Capital. “However, although this is seen as a newer area, in reality we are lending in a more old fashioned way than banks have been doing lately.”

An intense relationshipBeveridge describes the reason for this as the “intense” nature of the relationship between ABL provider and client. “In order to provide the loan, the asset lender needs a constant and current flow of information about the asset on

which it is based,” he says. “If a debtor is using invoice financing or factoring, the information flow will take place on a daily or wee-kly basis. If stock is the security,

then it will be a weekly or monthly basis. On top of that, the lender will instigate quarterly or three times a year audits. However, be-cause of the intensity of this ana-lysis, the ABL can lend a higher amount than the normal banking facility would have been able to.” The downside, for the lender, is the amount of work involved: because of the intensity of the scrutiny, it needs more members of staff.

Asset based finance in its current form has been around for at least 40 years, but it is over the last 15 that

it entered the mainstream, growing at over 10 per cent a year every year for the last decade. It is not right for every asset-rich company – a seasonal business, for example, one

supplying chemicals to the farming industry, might look for an alterna-tive to ABL because cash flow will differ wildly throughout the year – and many companies find that while ABL helps them through a specific period of change, they might want to revert to other types of financing after it.

Ideal arrangementBut in many circumstances it is ideal. “The use of asset based len-ding is increasingly widespread in MBO deals, largely because a structured asset based finance pa-ckage can provide more than just the funds needed to complete the initial buy-out transaction,” says Kate Sharp. “As well as the up-front funding, it can also provide a wor-king capital line to supply compa-nies with sufficient working capital after the transaction has been com-pleted.”

And, in the credit crunch, this can be a very good way to borrow. “Companies are examining their own balance sheets more closely to identify where capital is tied up and how they can become more intelligent in the use of their assets,” Sharp continues. “The dynamic

linkage between asset based finance and corporate assets makes it ideal for growing companies as the funding grows in line with the business. Unlike some other traditional lending sources, asset-based lenders look at the long-term goal of the business and provide support through the company’s growth and expansion. At a time when the availability of finance reduces on an almost daily basis

this is a distinct advantage.” Asset based lending is also

beneficial to a company for a number of other reasons. For a start, you

can’t over- leverage: if an asset is worth £300,000, you can’t

borrow £500,000 against it. Secondly, it

provides a revolv ing c r e d i t

f a c i l i t y . T h i r d l y ,

it is often cheaper than an

unsecured loan or line of credit, for the simple reason that the

lender can seize the piece of equipment

that has been borrowed against if the borrower defaults. And, ironically, the credit crunch might actually benefit ABL in the longer term. “We are seeing better quality corporate transactions than we have done in a number of years,” says Paul Beveridge. In other words, the traditional lenders have been pushing companies into the arms of ABLs. And there, post-credit crunch, they may stay.

“This form of funding is increasingly available and offers businesses a way of releasing funds into the business, which would otherwise be inaccessible”

sure good processes are in place.”The company has five major

clients in the industry and says it can save between 30 and 50 per cent of invoice processing costs. “Currently, when most companies generate invoices, the system is transaction-based rather than rules-based,” Chris Haden continues. “Our software can transfer this onto a rules-based system.” At its simplest, this means that, for example, the system can differentiate between a good and bad credit risk and in the latter case, allow the supplier to reclaim the goods even before the invoice has been issued. Apart from saving money pursuing a debt that will never be repaid, it also impacts reputational costs. “It makes the business look good,” he explains. “If a company gets a bad reputation, it makes an underwriter lose confidence – and so it ends up paying more in fees.”

ween. If you have small transac-tions involving someone buying a photocopier or computer equip-ment, there will often be standard documentation and legal advice won’t be needed. But further up the scale, where the assets are greater and the transactions more complex, you need tailored do-cuments and at that point clients should be taking advice.”

Tax advice is crucialThe most obvious role of a legal advisor is drafting the contract, but the lawyer will also offer tax advice. Deals are, indeed, often underpinned by their tax implica-tions both for the financier and the client company and if the transac-tion doesn’t attract the tax treat-ment the financier was hoping for, then the increased costs will be passed to the customer, who must be made aware of that.

Another of the major players

in the field is DLA Piper, the fifth largest legal practice globally by turnover. It, too, deals in the major manufacturing industries, although Graham Tyler, head of asset finance at the firm, says he is seeing increasing inquiries from other sectors such as technology, for example, to finance leasing equipment. “We explain to clients with no knowledge of the industry how a finance lease or an operating lease works,” he says. “We are also able to discuss with clients whether the transaction should be on or off balance sheet, and make suggestions to them as to who might be interested in the proposed transaction.

“As a general concept when considering a deal lessors and fi-nanciers are going to be looking at the lessee’s credit and the un-derlying asset and price the deal accordingly. For example, in the context of aviation, some air-craft are not so easily remarketed

at the end of a lease term and so may prove to be less attractive. Similarly, you might find a piece of equipment has been integrated into another piece of equipment, such as a GPS system and so the lessor will accept that the chan-ces of recovering the asset may be slight. These factors, coupled with the likely location of the as-set throughout the term, are key when a lessor is pricing a deal.”

Keeping paperwork tidyAs the industry has become increasingly complex, other service providers have grown up, too. One of these is Formscan, a document services company, which works with invoice financiers. “We provide a range of services around business documents, including storing, scanning, changing them to a different format and managing them online,” says managing director Chris Haden. “Primarily, we make

It is not just asset financiers who work in asset finance: there is a huge supporting network of other businesses as well. In the UK there are between eight and ten giant City legal firms who are active in the area: the one that has the biggest team is Norton Rose, which has more than 100 lawyers working on asset finance and in 2008 dealt with a transaction aggregate value of $20 billion for shipping alone. Most of the deals are large ticket items of £50 million or more.

“The role of the lawyer depends on which part of the market you’re talking about,” says Alistair Mac- Rae, a partner in the banking team at Norton Rose. “At its simp-lest, you have something like car finance, hire purchase, leasing and so on and at the other end you have airlines wanting to finance the purchase of an aircraft. And there’s the whole spectrum in bet-


Asset FinAnce & leAsing Support industries

Legal eagles who keep asset financiers flying highAsset financiers need to rely on professionals in other fields to keep their businesses running smoothly, among them lawyers and document service companies. They can be essential to a financier’s health.

Open marketplace for business financeWith headlines about ‘bank bailouts’ and businesses going bust due to the inability to quickly access critical business financing, it’s easy to believe that the end of the world is nigh and business financing is a thing of the past. However, the reality is that businesses still need financing and funders still need to close the deals to survive. The challenge in today’s economic environment is how to connect the two.

Financing is emerging as a key vehicle for businesses looking to not only survive the recession, but to emerge stronger. Investment in information technology, for example, can not only cut costs out of a business by streamlining business processes, but also give a business a real

competitive advantage. And in a market where even the smallest advantage could make the all important difference, financing is enabling businesses to invest in the future without the need for capital expenditure.

The dynamic nature of the market de-mands flexible funding and the need to think out of the box. Access to capital is the life-blood of every business, and with no sign of the credit crunch softening in the near future, speed to capital is now key.

Funders are undoubtedly more risk averse, not only insisting on more strin-gent credit criteria, but in many cases changing the offers on a weekly basis as

interest rates and market forecasts are revised. Being able to quickly, transpa-rently and cost effectively qualify the funding requests, process them and fulfil them is vital in such a fluid market.

The ability to secure funding with the widest possible choice, ensuring the best possible match to all stakeholders’ requirements is essential. In doing so, if the funder can also mitigate marketing cost, reduce operational costs, maintain customer relationships then some life can be injected back into the market.

Open online business finance marketplaces are enabling funders to re-enter the market and reach the right customers with the right products at the

right price. By matching 100 percent the audited credit score of the business with the financing rules of the funder, marketplaces like Smartfundit.com are taking the cost, complexity and time out of the end-to-end financing process.

It would be too easy to react to the current circumstances, and ring the bell of change for the sake of it. But business financing needs to learn from the lessons in other areas of financial services, and embrace evolving technologies in the way business is done. While not a case for revolution, there certainly needs to be some rapid evolution, and these troubled financial times may be the prompt it needs. Suki Gallagher, COO of Smartfundit.com


Asset FinAnce & leAsingSoftware

sides of the asset finance industry. She says that market conditions are more difficult than she has ever seen before, and that government initia-tives have in some cases done more harm than good. “Take the change in the rate of VAT,” she says. “It has not helped at all, not least because no one knows what it will be at the end of the year. Will it go up to 18 per cent? Why would someone want to take out an HP contract with that kind of uncertainty ahead?”

Towquest is currently providing its clients with the opportunities for cost savings by giving them a completely managed service, so that they don’t have to spend anything on software. “They might buy it ou-tright when the upturn comes,” she says. And the company is seeing some interest in its products from outside the UK, including countries such as Dubai, the Netherlands and Italy. “Our systems are always deve-loping and we are helping customers with different ways to maximise profit and minimise risk,” she says. “But at the moment I see no shift in the economic gloom at all.”

term lull while the financial world sorts itself out.”

He sees two areas of strength: the growth in short term low value len-ding and increased opportunities for captive finance houses and their parent manufacturers. “The first, personal loans, may not be a form of leasing, but it is still funding and de-mand is there,” he says. “As for cap-tive lessors, initially sales of capital equipment hit the floor. We under-stand that sales of new construction equipment are one-fifth of what they were a year ago. But companies do have to renew equipment for health

and safety reasons, and lessors are now actually able to command hig-her rates than they did a year ago, because other forms of funding have dried up.”

Lack of fundsIan Charik, director of Copernicus, which sells software to the HP and leasing side of the asset finance industry in the United Kingdom, United States, China and Africa, is considerably less optimistic. “I’m surprised anyone has a positive point of view,” he says. “The broker market is in a very bad way: they

can’t get funds and if funding isn’t in place, they can’t do business. New business has curtailed quite drama-tically over the last six months and we are finding it is only the occasi-onal niche player that thinks diffe-rently.”

There are other problems that have had an effect on the mar-ket, too, not least oversupply. “For many years, we worked with motor finance and asset finance until the early years of this millennium,” says Ian Wilson, sales director of Pancredit. “But we found there were far too many vendors in that sector, and so we made a conscious decision not to spread ourselves too thinly and moved into consumer lending instead. The largest pipe-line we see now is unsecured debt, and I will be very surprised if, when we see an upturn, all the vendors out there at the moment will have survived.”

No Government helpMeave Cray is the managing director of Towquest Ltd, a software company set up 20 years ago to deal with all

As the credit crunch has taken its toll on some areas of the asset fi-nance field, so its supporting in-dustries have been affected, none more so than software. Indeed, given that software, by its very nature, reflects exactly what is happening in a company, it was software experts who were aware before almost anyone what was happening in their field.

And, as with so many practiti-oners in asset finance, their expe-riences vary very widely depending on whether they are working on the HP and leasing or invoice finance side. But while the vast majority are aware that times have been dif-ficult, many are also beginning to see light ahead.

Short term lull?“We became very concerned last August when clients began to pull back on their development programmes,” says Michael Breach, managing director of Oyster Bay Systems, which supplies software to the asset finance industry. “There was a dramatic drop in new business and add on business. However, we do think the finance market is there. This is a short

Taking a hard look at the future for softwareSoftware providers are crucial to the industry. But for now most of them are in a downbeat mode.

“The change in the rate of VAT has not helped at all, not least because no one knows what it will be at the end of the year. Will it go up to 18 per cent? Why would someone want to take out an HP contract with that kind of uncertainty ahead?”

Documents

Asset FinAnce