Monday, 23 June 2014

The changing world of funding part 3

Asset Based Finance

Following on from Part 2 we continue to look at Asset Based Finance with a look into the costs. This is very timely with an article in the Times newspaper today
regarding some of the practices of asset based lenders which remains an unregulated industry. It has to be said that the Asset Based Finance Association are making moves to clean some of the practices of the industry but the article highlights the fact that there are often hidden charges "in the small print". The article refers particularly to termination charges/penalties. This has long been an issue for buyers of businesses where they want to use their own providers of finance. Often the agreements specify prohibitive costs for transferring title in the debtor book. Having control of the debtor book is seen as important for a purchaser of a business since they do not want a third party being heavy handed with "their customers" and simply collecting in.

The point that the above raises is that the cost of Asset Based Finance is not simply about interest charges. The following ought to be considered when making comparisons between alternative providers of finance and indeed, when comparing with other sources of finance. look out for the following costs and charges and also examine the interest rates;

Arrangement Fees / non-refundable commitment fees
Due Diligence and audit costs / annual maintenance fees
Unutilised facility fees
Covenant compliance fees
Termination fees (referred to above)

Other things to consider are your own company costs of reporting and being compliant with the lending agreements.

Whilst Invoice Discounting or Factoring can be an effective way for a small business to get funding for growth, business owners should be aware that it can increase the complexity of the business. It is critical for businesses to manage their cash effectively whether you have Asset Backed Financing, or not. Secantor can help with this process through helping to plan the funding requirement and to source the correct mix of funding.

In Part 3 we will continue with the Asset based Finance theme and extend it into other areas, particularly the all important supply chain.


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