Overcoming cash flow issues

Written by: Mike Nolan | Published:

For waste and recycling businesses looking to gain the necessary finance to fuel expansion or invest in the latest equipment, funding from more traditional routes has been scant in recent years. Mike Nolan, MD at asset finance specialist Academy Leasing, outlines four alternative avenues to the banks.

According to a recent Environmental Services Association (ESA) report, the UK waste management sector is set to see huge growth which could result in 10,000 new jobs between 2013 and 2020. The UK household recycling rate remains on an upwards trajectory, reaching 45% in September 2014 (up from 43.9% in the previous year).

With such strong growth opportunities ahead but bank lending still resolutely anaemic, cash flow issues can be a major stumbling block for recycling businesses.

But even if it is not possible to obtain funding from more traditional routes, there are other avenues open for gaining the finance necessary to fuel expansion.

1. Borrow against hard assets

A company's hard assets, such as compactors, balers or shredders, have a clear value that can be exploited to release working capital.

By demonstrating a sound business plan and ability to service the debt, it is possible for an organisation to borrow money against existing equipment without the need for further securities. Typically, lending will be arranged based on a fair valuation of the equipment and the amount of debt serviceable.

This kind of arrangement can even apply to equipment which is still subject to existing finance terms. The financier may be able to lend money to spread the payments over a longer term, reducing monthly outgoings and providing more financial flexibility.

It is also a viable option when attempting to fund equipment with limited resale value. Although it may be difficult to borrow money for the equipment itself, the lender may identify clear potential for return on investment (ROI).

As a result, finance may be offered with a charge on the company's hard assets, allowing cash to be freed for the purchase of the new equipment.

2. Lease equipment to preserve working capital

Securing funds for new equipment is usually much easier than obtaining a loan from the bank, particularly in cases where the lender has a strong working knowledge of the industry and existing relationships with suppliers and manufacturers.

An investment in new equipment to increase business capacity, drive new operational efficiencies or open new markets can deliver substantial ROI. A lender with good knowledge of the particular market will be acutely aware of this potential and therefore more likely to provide approval. In certain cases, the equipment will be in place before the borrower has even been required to make a payment, allowing them to immediately reap the rewards from greater revenue streams.

By leasing rather than buying, cash can be released to invest in the business, meaning any purchase of new equipment can also be supported by an investment in new people, structures or processes or increased marketing activity. Making timely regular payments can also help you to build up a strong credit history for your company.

3. Plug a cashflow gap

In the situation where an increased reserve of working capital is required in order to make the most of an acceleration in the market, invoice financing might help to plug the gap.

There are two forms - factoring and invoice discounting - but both provide a company with an advance on future revenues, allowing them access to cash when it is most needed.

In the case of factoring, the invoice financier will take charge of the borrower's sales ledger and collect money from customers itself. A percentage of the invoice total will be advanced up front, with the remainder paid on settlement, which could prove particularly helpful at a time when customers are late on payments.

Invoice discounting differs in that the financier will not collect any debts but will instead lend money against unpaid invoices as an agreed percentage of the total value. In both cases, an agreed fee will be charged for the service.

Such agreements will not require the personal guarantees demanded by a bank lender and, although capped, they are reviewed on a regular basis to ensure the working capital requirement remains adequate even when a business experiences rapid growth.

4. Borrow to buy

For businesses eyeing more rapid growth or keen to pursue consolidation in a particularly competitive market, expansion by acquisition may represent a golden opportunity to maximise new possibilities presented in a recovering economy.

Funding can be raised against the acquiring organisation's book debts, hard assets or, occasionally, even the soft assets and is two-fold.

First, the acquiring company must find the necessary finance for the deal itself and then secure sufficient working capital to ensure the move does not end up putting both companies at risk.

If, for example, £600,000 is needed for the initial consideration at completion of the acquisition, the acquiring company may, in fact, look to raise a sum in the region of £1million. A further £150,000 of this may be earmarked for new equipment or machinery to cope with increased demand with the surplus acting as working capital.

This extra working capital could be used to cover relocation costs, bringing the two companies under one roof in order to benefit from greater economies of scale. Usually such expenses would be drawn from a company's cash flow but, by borrowing against their assets, this situation can be avoided, providing the financial flexibility to cope with any issues arising from the new venture.


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