Regional director Chris Jones and director Damon Walford, of RBS Invoice Finance, explain the increased use of invoice finance.
Trade debtors are often the largest assets on a company's balance sheet.
Invoice finance, in the form of invoice discounting (sales linked finance), unlocks their value and provides immediate working capital to facilitate expansion.
It is of particular relevance when it comes to corporate finance transactions.
So why the increase in the use of invoice finance?
The flexibility it offers for one. Employing invoice finance allows a business to immediately realise the cash benefit of its sales and, given that the level of finance avail-able is directly proportional to sales, funding should automatically increase as a business expands.
Link to this the widening scale of how invoice finance can be used in the arena of asset-based lending and you can begin to see why it becomes increasingly more attractive to finance directors.
The market has witnessed a rapid development in the use of finance secured against assets such as stock and plant and machinery alongside invoice finance agreements.
Although we continue to fund a number of customers on a stand-alone invoice finance basis, we are increasingly being asked to look at providing facilities which are secured against the wider asset base of a company.
The flexibility that asset-baed lending, or ABL, provides in comparison to other more traditional debt formulas means that we can be more creative in our approach to structuring facilities.
In a competitive market, this ability to be flexible, take a holistic approach and match particular requirements, can make a real difference to a management team and assist with the implementation of their business strategies.
The growth in demand for ABL solutions has led to significant investment in our business to deliver for our expanding customer base.
Asset-based lenders have to consider more challenging debt structures including issues such as contractual debtors, high level of export sales, multi jurisdictional deals and so on.
To deliver the right customer proposition, we must have highly experienced relationship managers with small customer portfolios. This enables the relationship manager to exhibit a high-touch management style while fully immersed in the dynamics of their customers' businesses.
The level of activity in the M idlands market has impressed us this year.
Some of the transactions we have completed from Birmingham illustrate the different ways in which invoice finance facilities are used.
These include, a £20 million facility to refinance and extend working capital facilities for a business in the paper and board sector to support the management's growth strategy, and a £9 million facility to support two consecutive acquisitions in the packaging sector.
We have also backed a number of MBO and acquisition transactions in the mid-market which shows how the flexibility of ABL can help to plug the equity gap where sometimes there is limited appetite from the venture capital market to become involved.
We have, however, also worked alongside venture capitalists, with lines of £4 million and £2 million to support two separate private equity-backed MBOs in the building materials sector.
The majority of these deals incorporated funding linked to other assets in addition to debtors, and this is evidence of the ever growing desire to include ABL as a key component of the overall debt structure.
ABL helps to maximise cashflow headroom, which is so critical in the early days of a leveraged deal.
The appointment of Alan Couzins, formerly with Kroll to head up the ABL team at RBS Invoice Finance to support our regional corporate development directors is evidence of our investment in this product proposition.
We remain optimistic that the second half of 2006 will continue to be a successful and exciting time for the invoice finance market.
The first half of the year has bought a number of opportunities to the table, and this is continued evidence that the expertise as well as the capital base exists within the region to deliver leveraged solutions for Midlands customers.
As business has accepted ABL as a key funding tool, we have invested in our businesses to ensure that we can provide the specialist knowledge and expertise to deliver on what are more complex and increasingly larger transactions.
A clear example of this is the appointment of Richard Haighton within Euro Sales Finance as director of structured finance.
It's a national remit which we see as a natural progression, but using the geographical advantages of Birmingham and the local corporate finance community as a base to fulfil this national mandate.
As the world becomes a smaller place for trading, it becomes more important to have a funding solution that grows with your business.
This is what an invoice finance package does - by turning what is quite often your biggest asset on your balance sheet - your debtors - into cash.