Borrower beware: don't fall into the lender trap
By Jenny Roper Friday, 01 June 2012
Asset-based lending. Besides 'National Lottery win,' there are perhaps few sweeter three-word combinations to a printer's ears in these tough times. While banks are at best making printers work harder for finance and at worst cutting off the supply altogether, the asset-based loan is still seen by most as the printer's faithful friend.
But while most in the past used this trusty ally to fund a new piece of kit or another form of expansion, there are now a growing number of printers turning to the asset-based loan simply to survive.
"The credit crisis has not only resulted in big banks pulling in their cash by restricting lending, but in some cases by reducing or removing facilities like overdrafts," says business development director at Close Asset Finance David Bunker. "This has hit UK SMEs in restricting their ability to operate, let alone grow."
Ian Davies, director at brokers UCF Print Finance, agrees that asset-based lending, secured on an existing machine or pending invoices, is being used increasingly by printers to create cashflow headroom. "Some of the people I’m doing refinancing for are really sweating," he says. "The bank is basically saying ‘I want that overdraft down from £100,000 to £80,000 and I’ll give you a week to do it.’"
"A lot of printers go home on a Friday night £98,000 overdrawn on a £100,000 overdraft, and they know they’ve got to do the wages next week," he adds. "It’s a panic at the moment."
In these kinds of knife-edge situations, then, knowing where to go to quickly secure a good deal is imperative. And the situation is not as clear-cut as it once was. While asset-based loans may seem much more abundant than other sources of finance, their availability has not been immune to the downturn.
"I don’t think anyone has actually pulled out of the marketplace, but most lenders are exercising a greater degree of caution," explains Mark Bailey, director at Asset Finance Solutions.
So while lenders such as HSBC, RBS and ING are certainly more open to offering asset-based finance than traditional bank loans, they are scrutinising printers’ plans much more thoroughly than before. And the result is a much lower success rate within the printing community.
But if cash is a matter of life or death, it’s likely the rejected printer won’t take no for an answer. The next port of call for many necessarily has to be the less high-profile secondary lender, and this can lead to issues, according to some printers.
"Printers need to make sure they have signed up for a variable rate which means there should be no hefty charge for early settlement," says Charles Dew-Jones, managing director at Sarum Colourview printers. "If they go to one of the main lenders like HSBC, Lombard or Société Générale, the big people, they should get this, but some secondary lenders often have fixed interest rates in the small print, which a lot of people will sign up to without realising."
Mark Nelson, director at brokers Compass Business Finance, agrees that deals from secondary lenders are less likely to offer flexible payback options. "Your secondary tier are likely to stipulate the terms of the deal more strictly," he says.
Another pitfall printers desperate for cashflow should be careful to avoid, says Nelson, is actually choosing a loan with less flexible terms because the company in question is offering a more sizeable sum. Invoice discounting is an area where this can be particularly problematic, he says.
"Some customers only need a £50,000 overdraft, but they go to an invoice financing facility and because of the size of their turnover they might be given a £100,000 or £500,000 facility and they end up paying for that even though they don’t really need it," he says.
But those looking to secure a loan on a physical asset may also find themselves tempted to bite off more than they can chew in the face of less generous offers from the bank.
"Most big lenders are taking a harder line on the values of the assets that they’ll lend against," explains Paul Holohan, chief executive at Richmond Capital. "So let’s say a lender gives 60% against the value of a machine, if it’s worth £1m they’ll value it at £800,000 to start with. So you’ll get 60% of a smaller amount."
Deposits demanded by the big lenders are also rising, reports Dew-Jones, who says his firm recently had to pay a 15% deposit for the asset-based loan taken on Sarum’s new Heidelberg Speedmaster CX 102-5+L. "So I can see why secondary lenders offering no deposit and 100% of the value of the purchase seem attractive," he says. "But the trade-off can be finance that is very expensive long-term and very inflexible."
Of course, it is by no means the case that all big lenders offer fair terms and all secondary lenders do not – secondary lenders can sometimes be a better bet than primary lenders. It is a difficult market to navigate as a result and so research is essential. Also of help, though, could be a broker.
Such a firm, the argument goes, should know exactly where to look to find a lender compatible with a printer’s particular business type and proposition. They will also have access to lenders that only ever deal with printers through brokers, according to Asset Finance Solution’s Bailey.
A broker with an in-depth knowledge of print will also be aware, he adds, that where you’re best to take a proposition will depend on the type of machine you’re intending to buy or secure the loan on.
"If two people came to me, one with digital printer and one with a Polar guillotine, where I’d look to place the two deals would probably be completely different," he says.
He explains that digital printing equipment can be particularly tricky as it’s viewed as a highly depreciating asset. And so expert advice, he says, is crucial.
"If you’re trying to fund digital equipment – up to £50,000 worth – you could waste a lot of time going to banks with no appetite for that sort of thing," he says. "Also, a lot of banks have set minimum lending levels, so they’re not interested in smaller deals."
Brokers will also be able to advise on what information printers should present to make themselves more eligible for a loan, says Bailey.
They can also advise on how restructuring certain aspects of a business will make it a more attractive prospective borrower, says UCF’s Davies. "Lenders will want to see that you’ve taken other steps to streamline the business first," he says. "So it might be a case of reducing staff from 20 to 16, or closing a finishing department that you were paying £4,000 a month rent on."
Which begs the question of whether printers looking to get an asset-based loan for urgently needed cashflow should look to other courses of action perhaps instead of taking the plunge. Davies says many would be well-advised to do just this.
"A lot of companies that have seen turnover fall by 20% or 30% over the past 12 months, have still got the same staffing levels because they’re hoping things will pick up," he says. "But you can’t do that. You’ve got to get your overheads down and make it as cheap as possible to open your doors in the morning."
And so, in light of Davies’ experience that some printers are more willing to get an asset-based loan for cashflow headroom than they are to restructure their operations, it could be argued that this form of finance is in fact still too easy to come by.
Richmond Capital’s Holohan certainly thinks so. "I think there still aren’t really enough boxes people have to tick to get this type of loan," he says. "People are tempted to make ill-advised decisions because they’re so enthralled by the equipment itself and because this kind of finance is so commonplace in the industry."
And so perhaps what seems to be a reining in for asset based loans will have a positive impact. In the future, only those that can really prove a sustainable business plan will receive a loan, while those looking for a less-than-cheap fix to tide a business over to the next month will struggle. In the long term, this may benefit businesses as it will force them to reassess why they need that quick fix in the first place – and the answers to those questions are likely to help the industry as a whole as well as the individual company.
TOP TIPS: ASSET-BASED LENDING
- Remember that who to approach will depend on what type of equipment you’re funding or securing the loan on
- Consider getting an independent valuation of the company’s assets. "This will help illuminate untapped value and can cost as little as £500," says Close Print Finance’s David Bunker.
- Avoid penalties for early settlement. And if you have a deal in place that does involve this, remember there have been some successful legal challenges to these charges recently.
- Remember that although they may be more likely to give you the loan because you’re a known quantity, getting a loan from your own bank may limit your credit options. "I’ve seen a situation recently where within a matter of days after securing the loan, the printer’s bank was on the phone saying now they’d done the new deal they’d like to review their overdraft position because they felt the bank was too exposed," reports Asset Finance Solutions’ Mark Bailey. "So it's sometimes best not to put all your eggs in one basket."
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