asset based lending - time to step out of the shadows?
A quick look at the web-sites of many of the 43 members of the
ABFA (the Asset Based Finance Association – the trade association
for the asset based lenders in the UK) will tell you that asset
based lenders are geared to funding business growth. That is when
asset based lending facilities can really come into their own and
provide a truly flexible funding solution. So what happens in times
of recession? Do asset based lenders simply shut up shop and wait
for the tide to turn?
There is little doubt that the perception in some parts of the
market at least has recently been that asset based lenders have
withdrawn from the market during the recession. The fact that the
ABFA's own membership roster was longer only a few years ago is
testament to their being some truth in this perception as that list
used to count nearly 50 members. There have been some casualties
and some consolidation but is the perception that asset based
lenders had left the market justified?
A review of the industry statistics published by the ABFA[1]
shows that asset based lending as a means of commercial finance had
undergone spectacular growth prior to the recession. The volume of
clients sales financed increased 240% from September 2001 to
September 2008. The number of clients using asset based lending
increased almost 170% and the total advances to asset based lending
clients increased by almost 260% in the same period.
But by March 2008 things had begun to change. Up to this time,
growth in the UK asset based lending market had been in domestic
factoring and in fact principally domestic invoice discounting.
Whilst this trend continued into the second half of 2008, there was
a huge growth in stock finance (102% year on year in Q2 of 2008 and
141% year on year in Q3 of 2008) yet in the same period the overall
growth in client numbers was only 1%. This may suggest the clients
were perhaps holding too much stock. By the end of 2008, things
were slowing dramatically and while overall client numbers
continued to grow (1%), this was still mainly in domestic invoice
discounting and stock finance but at a slower pace.
By March 2009 the market was contracting, not just the asset
based lending market of course, but in the asset based lending
market client losses were now exceeding client gains, total client
sales and total advances were contracting and the swing, from 15%
growth in total advances from September 2008 to a decline of -18%
by September 2009 was huge, a decrease of in excess of £3 billion
in total advances and some £14 billion less client sales
financed.
This sort of change forces those in the market to look at their
security. At this time, the high street banks (including their
asset based lending divisions) were forced to try to value their
positions and that on the new business side manifested into a more
cautious approach, tightening of underwriting and security
arrangements went hand in glove; some positions were managed away,
other clients were less fortunate.
The trend of general contraction in the asset based lending
market continued through 2009 and into 2010 with the only area for
growth being in clients using asset based lending where export
sales featured in that finance package (no doubt helped by the
weakened value of sterling), notably the demand for stock finance
fell rapidly in this period (with stock finance client numbers down
40% in Q2 of 2009 and down 47% in Q3 of 2009, year on year).
By June 2010, the rate of contraction had slowed, there was some
evidence of restocking but overall the market was smaller (10%
fewer clients than in June 2009) but clients requiring stock
finance and export finance were growing again. By September 2010
while overall client numbers were lower than in September 2009 for
the first time since (at least) March 2009 (when the ABFA began
publishing this statistic), the number of clients gained by asset
based lenders was greater in this quarter than those lost, in other
words the number of businesses using asset based lending grew.
That number of new clients gained in Q3 of 2010 though was still
only 40% of the number of new asset based lending clients recorded
in Q3 of 2009, two years before. Nevertheless, total client sales
financed had returned to pre-recession levels and as I said at the
outset, this is where asset based lenders can really come into
their own because of the flexibility of asset based lending to
finance growth, or sales, by businesses particularly where asset
values are weak and more difficult to leverage with traditional
debenture lending or overdraft.
In my view, it is this contraction in the marketplace at a time
when some major parties in the asset based lending market were
having to look at their own books as much as what was happening in
the marketplace, the fact that asset based lending is by and large
a growth finance product and the market was contracting and that
therefore the opportunities to add value to a financial package for
refinancing was not available due to the highly leveraged and
perhaps overvalued assets of some businesses, that the perception
arose that asset based lenders were not in the marketplace.
But it is clear too from the same source of statistics that in
the same period asset based lenders continued to provide finance to
businesses, however client losses exceeded client gains. In the
period from January 2009 to September 2010, asset based lenders
took on 22,320 new clients. In the same period though, they lost
28,606. In my view, it cannot be said that an industry that wrote
business for 22,320 new clients during 21 months of a recession is
not open to business and neither in my view can it be said that an
industry that even in the depth of recession advanced nearly £14.5
billion of funds and financed sales of over £190 billion is not a
useful source of finance.
By the end of 2010 these same figures had grown to £15.1 billion
of funds advanced and sales financed of £212 billion (a return to
pre-recession levels).
If the economy continues to improve, then I would expect these
figures to increase as there is little doubt that asset based
lending can finance a client's growth requirements. It is geared to
clients sales performance, not the asset value or capitalisation of
the asset based lenders client and if the client can demonstrate
good business and positive cash flow, then asset based lenders will
no doubt be attracted to it as a proposition.
Asset based lenders are a flexible lending group with a now more
sophisticated product, offering finance not just on receivables,
but on other asset groups also. As we exit recession and because
this type of finance is not limited by the underlying asset values
of a growing business, it seems clear that asset based lending is
definitely in the market, asset based lenders are in the market and
with its potential to finance growth in an economic recovery it is
very definitely a useful source of finance. In fact the recession
may just have given asset based lenders the opportunity to take
centre stage in the UK's financial recovery and for asset based
lending to achieve its destiny to become a widely accepted form of
mainstream corporate finance.
[1] (to 3rd quarter 2010 – latest available statistics at time
original article was written).
