Asset alternatives

It is a mixed but generally positive response to the finance market in 2012. A quick straw poll from our business customers would yield a varied response - busy for some businesses but quiet for others.

Businesses in general, however, are in a better accounting position than they were when we went into the recession, with overall borrowing reduced and cash balances increasing. Asset finance lending is increasing as businesses are looking more at how loans are structured and relying less on facilities, such as overdrafts, that can be withdrawn overnight.

In years gone by, a company with an average balance sheet could obtain finance relatively easily for non-core assets (assets with little resale value). Companies with a poor balance sheet would struggle to obtain finance for non-core assets but could still obtain finance for strong assets such as plant, machinery and vehicles.

Now the asset is key as the banks are looking for more security. But this leaves a black hole for less established companies looking to obtain finance for non-core assets.

This opportunity has led to an increase in business for us as brokers as the banks have been reluctant to lend money to these businesses. In 2010 Anglo Scottish finance spotted an opportunity where customers we knew to be creditworthy were being declined by lenders for the smallest of reasons. We created DPM finance and started lending our own funds to these businesses. To date we have lent £1.4m, with bad debt running at only 0.03%.

Refinance option

These challenging times are forcing companies to think differently about how they are financed, both to help cash flow and investment. While banks continue to appear reluctant to lend, others are stepping in with innovative products and are changing the ways companies view finance. One such option is refinance.

Many companies do not realise they have access to finance and often don't have to look further than their own balances sheets. Refinance is not exactly new but the market has not generally understood the potential, viewing it as distressed lending, when in fact it is a really smart business decision to get the assets working for the business. The rates are competitive and interest can be written off against tax.

Hire purchase and leasing are still the mainstays of finance for the SME. The recent budget reduced the annual investment allowance (AIA) and writing down allowances. The AIA lost a lot of its appeal with the reduction from 100k tax write-off in the first year to just 25k. In addition, the reduction of writing down allowance from 20% to 18% will stretch the period it takes to write off plant and machinery from 10 years to 12.

That said, hire purchase and leasing still remain the easiest and most popular way to acquire business assets. Rates are low and end users like to match the monthly payments against the assets income. As more lenders are chasing the traditional assets, more and more lenders are offering VAT deferrals, non-deposit and longer-term deals, going back to what was available pre-credit crunch.

Help yourself by understanding what underwriters are looking for. In most cases an underwriter is looking for serviceability of the debt and an exit strategy if things go wrong. The issue of serviceability can be shown by providing the usual set of accounts, management information and three months of bank statements.

However, in addition to this, let the broker know how the asset will generate income. Is the asset replacing one currently on finance? Is the asset being purchased for a contract or specific job? If the underwriter can see how the asset will generate income they are more likely to agree the deal.

Exit strategy

The exit strategy relates to the security in the deal. The likelihood is that you will know more about the asset than the finance provider (especially on specialist timber machinery). Let them know the resale values of the asset, how easily can it be sold and even what types of businesses would benefit from such an asset. A personal guarantee may be required; if so let the broker know the value of the person behind the guarantee, especially when financing assets with little or no value.

Asset finance is a flexible alternative to a traditional bank loan, providing significant cash flow and tax benefits for businesses looking to purchase a new piece of equipment, a vehicle or other fixed assets.

Prophet in timber

Harrogate-based credit insurance broker Prophet Group is one of the latest companies to join the Timber Trade Federation.

Established by David Encell 13 years ago, the Prophet Group already has several existing timber company clients including Arnold Laver and North Yorkshire Timber, plus agents Pacific Lumber Supplies Ltd and Park Row Partners Ltd.

"We have a reasonable exposure in the trade but it's something we do want to increase," said Mr Encell.

"We want to get more involved by attending London Softwood Club meetings. I have been to the last two TTF annual dinners. The intention is to get our profile raised, be more visible at events and help people who want help and advice."

Mr Encell, a former director of Marsh Trade Credit, said Prophet Group also offered debt recovery and business information services to provide a holistic financial service.

He agreed that some credit insurers had not covered themselves in glory in 2008-09 when there was widespread withdrawal or heavy reduction in cover for timber companies, but argued that the credit insurance industry had now put itself in a better position by underwriting cover based on the latest financial information rather than outdated figures.

"Insurers have successfully persuaded many companies to provide more up-to-date information. Not all clients have taken to this and there is still some reluctance to release business information, but it has certainly altered the position insurers find themselves in," said Mr Encell.