Asset-based lending could hold the key that unlocks UK’s resource potential
Barriers to investment continue to present hurdles that the UK’s resource infrastructure is struggling to overcome, suggests Neil Jefferies, financial controller at UNTHA UK and business development manager for UNTHA Finance. But does asset-based lending hold the answer?
It cannot be disputed that the level of wealth within waste is becoming increasingly acknowledged. Yet still the UK struggles to realise the true potential of ‘rubbish’, largely because of the continued fiscal battles that organisations face when trying to fund recycling, resource recovery and Waste to Energy facilities.
Of course financial difficulties are apparent within varied UK marketplaces, not just the environmental sector. Banks generally remain reluctant to lend following the economic downturn and whilst grants do exist to support business growth, the extensive ‘red tape’ and complex paperwork surrounding such incentives renders many unattainable. However there are industry-specific issues for organisations within the waste and recycling arena to contend with too.
Many companies looking to secure finance are often the same companies that are striving to develop new technologies, systems and processes that will better-steer our country along the resource efficiency roadmap. These organisations are pioneering and entrepreneurial, and they have the solutions that could initiate real progress. But, in many instances, these organisations are also new start-ups. This means they lack the credit history or balance sheet strength that most financial institutions are looking for, making funding difficult to secure. They also struggle to raise the capital to purchase plant, equipment and technologies outright. Ludicrously, it is these organisations that have the potential to make a real difference, but they cannot get the foothold they need to grow.
Asset-based lending goes some way to overcoming such commercial obstacles. The concept is not new, but in the last 12 months it has grown in respectability and relevance. Acknowledging the need for this type of financial aid, asset-based lenders have introduced more competitive rates, they have paid real attention to organisations’ business plans and their credibility as a much-needed economic resource has rocketed as a result. This approach is relatively agile too – decisions are not bound by traditional banking hierarchies meaning agreements can be established quickly.
It works by leveraging finance against the value, security and long-term residual worth of an asset. This is why asset-based lenders are not so easily ‘spooked’ by marketplace volatility or balance sheet weaknesses – if a customer was to continually default on payments, the asset could be retrieved and resold at market value, thus protecting the lender. But more often than not the agreement works, providing a cost-effective way for businesses to invest in the assets they need to grow their operations and improve the UK’s resourcefulness.
The beauty of asset-based lending is that it is flexible. With a lease package for instance, the organisation effectively rents the asset from the lender, for a monthly fee. At the end of a specified finance term of usually three to five years, the asset can be returned, purchased, or there is the option to move on to a secondary lease agreement, perhaps for an upgraded asset should the customer’s requirements have changed. In each of these scenarios VAT is paid proportionately every month, making the expenditure very manageable.
Alternatively, the cost of an asset can be spread with a hire purchase agreement. Here VAT is payable upfront then, following a series of monthly repayments, the asset is owned outright by the customer at the end of the term. Until 2015, capital allowance tax relief can also be claimed when assets are procured in such a way.
The key thing here is that there is flexibility in the marketplace – a ‘one size fits all’ approach is no longer suffice. Options exist, even for companies who previously thought finance was out of their reach. Perhaps asset-based lending therefore holds the key that could unlock the UK’s resource potential.