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The ability of any business to generate working capital from its assets has become an increasingly important financial tool in recent years. This has been particularly apparent in the holiday and home park sector, with a growing number of holiday parks obtaining funding this way.
Whilst asset based lending (ABL) was historically the preserve of multi-national companies, it has become apparent that in the recent past more and more SMEs, particularly in the holiday and home park sector, are beginning to see the potential benefits. In the second quarter of 2012 alone, the UK based trade association body known as the Asset Based Finance Association (which represents about 95% of the UK & Irish market) reported total advances to businesses of £16bn, an increase of 2% on the same quarter last year.
So, what is ABL and how might it be an attractive option for businesses in the holiday and home park sector?
At its most basic, ABL is a form of financing whereby a lender advances funds to a borrower based on the value of certain types of the borrower’s assets. Because of its ability to help holiday parks effectively manage its cash flow, one of the more popular types of ABL within the sector is invoice financing.
Invoice financing is a way by which a company can generate cash by selling its book debts that are owed to it but which have not yet been paid. The most common forms of invoice finance are ‘factoring’ and ‘discounting’. Whilst the terms are often used interchangeably, there are subtle differences:
| Factoring | Discounting |
| The arrangement tends to be disclosed to the debtor | Normally, the arrangement will be undisclosed – i.e. the debtor will not know of the arrangement |
| The Financier is responsible for collecting debts | The company retains responsibility for collecting debts |
| The sale ledger is normslly operated by the financier. Payments of debts are made directly to the financier by the debtor | The company retains responsibility for administering its sale ledger and is responsible for accounting to the financier |
| Advances are made against debts sold to the financier for a percentage of the total invoice value (advances of 80% plus are not uncommon) | Advances are made against debts sold to the financier for a percentage of the total invoice value. Amount of advance is determined by quality of debtors, nature of the debts, company’s systems, dilution of debts, cash-flow requirements and other similar considerations |
Holiday parks that are either closed or have low numbers of guests throughout the winter can be particularly affected by cash flow issues – therefore, the ability to raise cash immediately on the basis of summer bookings can be extremely attractive. Nonetheless, before they commit to any advances, lenders will need to carry out due diligence on the park and more particularly its debtors and the terms on which they contract.
If you would like to discuss how asset based financing may benefit your business, or to discuss any other queries relating to your holiday park, then please do not hesitate to contact:
Harry Trick, on 01392 687736 or harry.trick@michelmores.com.
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