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Friday 19th August 2005
Commercial finance takes off
For growing firms in need of financing there have, historically, only been two real options available – namely, debt and equity. But while both offer access to cash and their own distinct advantages, they also pose unique drawbacks for those pursuing them.
Securing the support of an equity backer (such as a business angel or venture capitalist) for instance, is not only difficult but also results in the cash-seeking entrepreneur being forced to surrender a degree of control over his or her business to the new backer. Those opting for a bank loan will retain complete control of their business, but will be shackled to the regular repayments associated with debt and will have to provide some form of security too. Placed in this context it is little surprise that commercial finance has come increasingly to the fore of late.
In itself something of a misnomer, commercial finance refers to a variety of asset-based lending schemes offered by banks and other specialist providers. A variety of services are available and individual products are suited to businesses of differing sizes.
X Factor
Factoring, for example, offers a means through which early-stage businesses can rapidly raise cash against as yet unpaid invoices. ‘One of the biggest problems growing firms face is getting the cash in,’ remarks Ian Byers, corporate development director of Lloyds TSB Commercial Finance. Without cash, workers cannot be paid, raw materials cannot be purchased and a business cannot function. ‘It is often poor cash flow that causes businesses to fail,’ he adds.
Invoice discounting (ID) is a similar service targeted at slightly larger businesses. The major difference between ID and factoring is that, while the latter sees the financing firm advance its customer a percentage of its unpaid invoice value and then go on and collect the money owed itself, the former allows the client to retain complete control over its sales ledgers and cash collection procedures. To this end a business’ customers will never find out that an invoice discounting firm is involved.
For growing businesses the big differentiator between both factoring and ID and the more traditional forms of bank finance is that the commercial finance offerings grow with the business. As sales increase, so too do the levels of cash that can be freed up. And because businesses are borrowing against the money they are already owed, it reduces the risk of getting into too much debt.
Beyond cash flow
While most business owners’ experiences of commercial finance will be related to these two areas, there is much more to asset-backed finance than purely enhancing cash flow.
Commercial finance firms will lend against a whole host of assets in addition to invoices – including stock, machinery and equipment, property and land – and they can play a role in leasing and hire purchase agreements too.
Most intriguing of all has been the recent rise of commercial finance in corporate transactions, with a plethora of acquisitions and buyouts now being either part or fully funded in this way. In many ways, accessing capital in this way can be easier than securing traditional debt packages and is certainly far simpler than identifying an equity backer.
‘The advantage we have is that we’re looking at assets,’ Byers reflects. ‘Traditionally, banks look for security only and venture capitalists look at the quality of the management team – we can take a more balanced view.
‘I think there has been an evolutionary transition of the asset-backed lending market and maybe it’s a generational thing. More and more of the people setting up businesses today aren’t influenced by the opinions that prevailed ten years ago. We get a lot of leads from the internet and people seem to be doing their own research these days, working out what options are available to them.’
The one thing to remember, however, is that in these instances, commercial finance firms do act more like venture capitalists than anything else. ‘We can provide anything from £1 million up to however far you want to go,’ says Byers. ‘But there’s been a definite move towards syndication and if we find a deal that is too rich for us alone we’ll look to work alongside some of our competitors.’
Elliott Davis
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