The growth of lending against receivables and intangibles illustrates one of many creative ways of raising capital. In July this year we had two strong pieces of evidence to support the theory that asset-based lending is becoming more popular and more sophisticated. The first was that the Factors & Discounters Association changed its name to the Asset Based Finance Association (ABFA) simply to reflect the growing diversity in assets now used in lending. The second was the release by ABFA of figures showing that outstanding advances against assets grew by 22% during 2006 to stand at £13.65bn at the end of the year. As Jeff Macklin, MD of FDUK, says: "45,000 UK companies have now used some form of asset-based finance, and the industry is now estimated to be worth £158bn and is growing by £10bn each year. While it was once seen as the last chance saloon of business finance, and a clear indicator that a business was in trouble, it is now increasingly being used by shrewd financiers as a strategic means of managing cash flow and providing working capital. "The invoice financing industry has been strong in the UK for some time, but until recently financiers have shied away from using other assets for finance.

This has all changed in the past five years. Now, it is fairly common for companies that have invested heavily in stock, such as manufacturers, print firms and retailers, to borrow against stock, property, machinery and equipment. Alternative finance MFI is a good example of this. In 2005 it was in trouble: while its trade division Hewson was making £100m a year, its better-known retail division MFI was losing almost exactly the same amount. It was on the verge of breaching a loan covenant and so needed some alternative finance. It was unlikely to receive any from traditional finance sources, so it turned to asset-based lenders.

Terry Powell at Lloyds TSB commercial finance, says: "We looked into the business and in February 2006 we lent it £150m on the back of its debtors, its stock and its property. This gave the company certainty of funding and allowed it to focus on its turnaround strategy."A year later, when it sold the retail arm to venture capitalists and became Galiform, Lloyds was able to increase the lending to £175m, simply because it had removed the loss-making arm of its business, and so the financiers were more confident about its prospects." When we first started doing asset-based lending in 1991 it wasn't that popular. Now, though, it's coming to the forefront. It's a good way for us to help clients who have run into difficulties," says Powell. Other finance companies are going much further. They are beginning to use asset-based lending not solely for business recovery, but also for mergers and acquisitions. In fact, according to a survey among 100 financiers by GE Commercial Finance, the most popular use of asset finance in 2006 was for MBO/MBI deals. Merger and acquisitions were also popular, with those 100 financiers reporting that, in 2006, they completed an average of 4.8 M&A deals each using this method, compared to just 3.4 in 2005.

To give an example, in July 2007, Landsbanki announced that it was to supply £19m of debt facilities to fashion retailer All Saints. This will enable it to refinance existing loans from shareholders to the company and to fund the addition of 13 stores per year until 2010 onto its existing 49, and to increase revenue from £27.9m in 2007 to £102m by the end of 2010.The £19m debt facilities are split between a £10m asset-based facility and a £9m loan. Russell Gilling, business development director at Landbanski, says: "We are doing more of these deals that combine traditional leveraged finance with asset-based lending." Growing popularityThere are three main reasons why asset-based lending is becoming so popular. John Jenkins, chief executive of GE Commercial Finance, describes the first: "Quite simply, it allows companies to leverage greater funds than they would with traditional forms of lending.

For example, last year we did a deal with Boosey & Hawkes, a firm that owns the publishing rights to various composers' works. It wanted to buy more rights and needed cash to do it, so we funded it based on the rights it already owned." Mark O'Neil, client director at Vantis explains the second: "Much of the demand for asset-based lending is coming from smaller companies. Venture capitalists are increasingly looking to invest in bigger, less risky companies and banks are increasingly demanding personal collateral on loans, so smaller firms are turning to asset-based lenders." But it's clear that asset-based lending is now well established among larger companies and that growth in the future will come as much from smaller companies using it more widely as from those large groups starting to use different assets such as brands and other intellectual property. Kate Sharp, CEO of ABFA, outlines the third: "It's much more difficult for people to overstretch themselves with asset-based lending.

The financier typically gets very involved in the company and develops a very clear understanding of the value of an asset. They're smart people and are not going to lend more than its worth, so repayment is rarely an issue. In fact, in most cases, it becomes a revolving facility, with funding increasing in line with assets." However, all is not as rosy as these finance providers like to suggest. Companies can and have defaulted on asset-based lending and when it does happen, because the company has already sold its assets, the landing can be very painful indeed.

Christian Humphreys, associate director at SHM Smith Hodgkinson, points to FM Rail, a Derby-based railway spot hire and charter company, which was struggling for cash flow, so refinanced using assets and then defaulted and was liquidated in late 2006. "The main thing is not to over-stretch yourself," says Humphreys. "Make sure you have a plan for repaying your asset-based deals. Also, ensure you get proper value for your assets and use a company that offers good rates and is flexible in how it deals with you." Tim Bostock, divisional director for Clydesdale Bank's Financial Solutions Centres, says: "Be prepared to present clear and clean management and financial information to your debt providers. Make sure you leave a good level of headroom within the facilities to accommodate unexpected blips, but bear in mind that funders will share this desire for headroom and flexibility because, fundamentally, everyone's overriding objective is that the business that they're collectively investing in is successful." Financiers want to lend first on the back of assets that can most rapidly be turned into cash. Hence why invoice financing was initially so popular. We are now further down the line into inventories, plant equipment and property. Before long, we will be moving into intangible assets such as brand and the quality of management.

Stuart Whitwell is the MD of Intangible Business, a firm that helps financiers assess the value of a company's brand. He says: "On the whole, UK banks still don't recognise the potential in a brand. However, they're slowly getting there. They can see that having McVities on a pack of Jaffa Cakes can add to the price of the pack and the market share. From there it's a fairly simple step to calculate the value of that brand. I recently worked with a bank to provide security on a loan to a company based on the value of the brand, and I expect we'll see much more of this in the future."

One banker who does understand the value of intangible assets is Gary Edwards, head of asset-based lending at Investec, who believes that lending decisions should be based on the quality of management in the company, rather than on the value of its assets, or its ability to repay." We work with entrepreneurs like James Caan, a man who has bought and built many recruitment businesses. He came to us recently with an idea for a buy-and-build in that sector, so we looked at his track record and at the quality of the management team around him. On the back of this, we gave him the finance he needed.

Ultimately, it's about understanding how a business works and getting capital to the people who are most likely to use it effectively," he says. We can expect to see finance providers continuing to lend greater sums of money against an ever wider range of assets in increasingly diverse scenarios. As Peter Ewen, director at Venture Finance, says: "At a time when the world's economy looks set to become increasingly unpredictable, more companies and financiers are going to see the benefit of basing their valuations on something as stable as assets. For this reason, if no other, asset-based lending is here to stay."