Asset Finance covers a range of credit and credit-like products that enable either the acquisition of new assets (e.g. equipment) or a release of capital tied up in existing assets (e.g. stock) or those created in the ordinary course of business (e.g. receivables).
Asset finance solutions are attractive when major banks are either unable to recognise the asset class, seeking prohibitively expensive or restrictive terms, or not permitted to provide additional ‘single-name’ credit lines, regardless of merit.
There are two key structures that apply to all asset finance products:
- Credit + Security aka “On Balance Sheet”: The financier provides a loan facility to the borrower, with a registered security over a specific assets or pool of assets. The assets are owned by the borrower in this structure.
- Purchase + Lease aka “Off Balance Sheet”: The financier purchases the asset(s) from or on behalf of the borrower, then gives operation control and usage of the asset(s) to (or back to) the borrower via a lease or equivalent contractual arrangement. The assets are owned by the financier in this structure.
Case Study: Asset Finance
A privately held importer and distributor in the FMCG sector was experiencing working capital pressure due to rapidly growing demand for several exclusive brands.
The importer had a status quo of approximately $11m of stock on hand, with a working capital cycle of around 110 days, funded entirely by equity. Because of the relatively nascent market presence of the key brands, local banks were unable to recognise a material liquidation value of the stock and thus could not lend at a useful LVR for the Company.
A non-bank credit fund was able to provide a ‘borrowing base’ facility, allowing a 55% LVR against the highest velocity stock and 40% LVR against other stock.
The higher cost of funds (>10%) compared to bank rates, was significantly outweighed by healthy gross margins on sale (c. 40%). Therefore, the funding package delivered material earnings growth via a 2x uplift in stock throughput.
We discreetly match established worldwide companies with over 400 domestic and overseas private equity investors.
We work with established companies with over $10m revenue looking for debt or equity between A$5m and A$200m.
Equipment Finance refers to the acquisition of new hardware of various kinds, from yellow goods and machinery to vehicles and aircraft. On and Off Balance Sheet solutions are readily available in such cases, with tax planning often influencing the choice of structure.
Trade Finance encapsulates various capital solutions for import and/or export intensive businesses, generally split into two categories; ‘Credit’ and ‘Surety’.
Credit products include Export Finance, Import Finance and Commodity Finance. These products reduce working capital requirements while assets are in transit or in storage prior to a manufacturing or production process. Surety products Bonds, Guarantees and Letters of Credit. These are forms of risk mitigation for the Borrowers supplier or customer counter-party.
Inventory Finance is the funding of finished goods that have been purchased or manufactured and are ready for sale in the short term.
Invoice Finance enables cash advances against the Accounts Receivable ledger, secured by specific underlying invoices. The borrower typically remains the ‘owner’ of the invoice. Factoring is a variant of Invoice Finance that involves the legal sale of invoices to the funding party, which is then disclosed to the debtor.
Progress Claim Finance is a subset of Invoice Finance, involving credit advances against specific milestone payments within a broader multi-stage supply contract.