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| Feature on Asset Based Finance |
Comments from John Deeley at valuers shm Stevens Champion in Birmingham for the Birmingham Post
Asset based lending
Asset based lending can play a key part in helping in the turnaround process. Many businesses do not always make the best use of their assets and often, particularly in the manufacturing sector, there is a value locked up in plant and machinery that could be used to generate funds.
Asset-based finance is offered as operating leases, hire or lease purchase, sale and leaseback and chattel mortgages by banks, finance houses and independent funders so providing a real alternative to extending overdraft facilities, factoring or invoice discounting. The market in recent years has seen a growing number of more specialist lenders so making it easier to find the best solution.
We find that balance sheet values can often underestimate an asset’s real value, so it is essential to use specialist valuers, who know the plant and machinery market and are experienced in valuations for asset-based finance, secured lending and structured finance.
It is important to consider what equipment there is to be put forward for asset-based finance. The most suitable is general equipment, such as machine tools, fabrication and woodworking machinery, contractors plant, print and print finishing equipment, for which there is a ready market. Finance providers are less keen to lend against specialist machinery without additional security measures, as the market is more limited. Specialist processing plant is a prime example of equipment, which will prove difficult to provide a realistic valuation as there are a limited number of purchasers in the market.
From the lenders point of view, consideration should also be given to the securitisation of the strategic, but not necessarily commercially valuable assets such as IT equipment. In the event of any future recovery or insolvency procedure, this will enable the primary business assets to remain under the control of the lender/insolvency practitioner and therefore provide the best opportunity for the sale of the business, hence maximising the realisation of the secured assets.
One of the most straightforward asset finance routes is sale and leaseback, which is becoming increasingly a viable and beneficial option as it allows companies to access capital ‘quickly’.
Banks and finance companies will lend a percentage of the market value of the plant and machinery or property. The ownership of the machinery will pass to the lender until the loan is repaid.
A recent example of a sale and leaseback process is with a printing company looking for a cash injection of £500,000 working capital. They decided that the best option for them was to raise the cash by borrowing against their principal unencumbered assets. They approached a funder who appointed professional valuers, shm Stevens Champion to assess the value of the principal items of plant and machinery for secured lending purposes.
As the assets had a value over and above the capital requirement, and thereby meeting the lenders percentage criteria, the sale and leaseback was agreed. In this instance, the printing company invoiced the funder to the total sum being lent and then (on agreed repayments and term) leaseback the assets from the funder.
In comparison invoice discounters help companies raise capital against the debts owed. To help them secure their position and potentially allowing more working capital to be accessed, they will take the unencumbered assets – in full or part in the form of a chattel mortgage.
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