We work with a range of companies in the Manufacturing and Industrials sectors and there remains a number of persistent challenges when it comes to growth, even for well-established and sizeable businesses.

For example, being largely capital-intensive sectors, raw materials, labour and overheads must be paid for long before customer invoices are settled – sometimes 60 or 90 days later. Invoice discounting helps by advancing funds against those invoices, typically up to 80-90% of their value. Yet, this retrospective approach only reflects work already completed. For businesses eyeing ambitious growth, it doesn’t address the upfront costs required to get there.

It is possible to borrow against raw materials or components stock, but advance rates are typically low and cover only a small portion of the overall growth funding required (whereas plant and machinery may already have hire purchase arrangements in place).

It is therefore unsurprising that we’re often hearing of plans being shelved or slower expansion being funded by owners dipping into personal reserves, remortgaging, or taking out other personal debt, a risky move but especially so in these uncertain times.

Asset-Based Lending (ABL)

To ensure growth, it is important that ABL facilities are carefully considered for capital intensive businesses. These can be funded across multiple asset classes mixed with an element of cashflow where there is a shortfall. The ultimate aim is to get a mix of facilities that provide enough headroom for growth plans and with all funding structures having been considered.

Cashflow Lending

Cashflow lending, meanwhile, is obviously based on a business’s projections – sales forecasts, order pipelines, growth plans and ultimately future earnings – to determine funding. This cashflow funding can be structured as part of a wider ABL facility from an ABL lender, or can sit behind an ABL facilities, providing an additional layer of capital, tailored to your future potential. Lenders assess your financials, market demand, and track record to offer a cashflow boost that aligns with your future ambition, not just your past.

For SMEs in manufacturing or industrials, this hybrid approach is a growth lifeline and can be a source of serious competitive advantage. Not only does it ensure that a business does not have to pass up new contracts or expansion opportunities, it is also assessed in line with deliverable earnings, therefore unlocking growth without diluting equity. Getting the facility limits right under and ABL facility is key in this regard and where multiple asset classes are being funded a detailed headroom model is essential.

Just like with any other obligations, such debt presents risks, which lenders control to some extent with covenants. To unlock potential whilst minimising risks, our work with clients starts with detailed interrogation of their cashflow forecasts, costing planned growth initiatives and stress testing key assumptions. Getting this right with a corporate finance advisor is vital and should be done before approaching the funding market, where different lenders have their own established ways of assessing any such funding propositions (lender confidence is all too easy to lose with lack of preparedness).

After sustaining the recent shocks of Covid, supply chain interruptions, the war in Ukraine, elections and other headwinds, many business owners are in no mood to postpone growth. ABL alongside cashflow lending is vital in ensuring that this growth finally takes place.

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Alexei Garan is a Partner - Busing Funding at Shaw & Co

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If you'd like to discuss how Shaw & Co can help you sell, buy or fund the growth of a business, please book a meeting here