Financing tools for tackling transformation tasks at SMEs
The economic transformation in the wake of digitalisation, sustainability requirements and global structural changes presents considerable investment challenges for small and medium-sized enterprises (SMEs). Many companies need to adapt their business models, modernise their production structures and implement environmentally-friendly processes. At the same time, the necessary financial resources for the implementation of such transformation processes are frequently either not available or not in insufficient amounts, so that alternative forms of financing, such as, sale-and-lease-back, or asset-based lending are gaining relevance. Here, valuable assets are employed as collateral and capital is thus unlocked. This article also focuses on the integration of subsidies into SME financing.
Sale-and-lease-back as a financing tool that releases liquidity
Sale-and-lease-back is an object-based financing model where a business sells assets - for example, machines, systems or parts of the vehicle fleet - to a financing company and subsequently leases them back. Operationally, the business remains in possession of the rights of use while improving the structure of the balance sheet and creating instant liquidity. Although, lease payments will have to be made in the future.
How it works and possible uses
The sale results in the unlocking of tied-up capital that can be immediately used for investments in digital or sustainable transformation measures. Sale-and-lease-back is frequently used to finance investment projects in the areas of digitalisation and energy efficiency. Furthermore, short-term liquidity shortfalls can be bridged, or support can be provided during restructuring phases. The tool is particularly suitable for businesses with valuable, fungible assets. In practice, the financing volume typically ranges between € 400,000 and € 15m.
Advantages
The advantages of sale-and-lease-back lie in, among other things, the independence from credit quality. The assessment is primarily based on the resale value of the assets and not the creditworthiness of the business. Furthermore, the process can be swiftly implemented. Normally, the transaction can be realised within a few weeks, which will significantly improve the equity ratio and allow the credit quality to go up. Another advantage is that sale-and-lease-back can also be organised independently of banks. This method is frequently executed by specialist finance providers and this thus enables SMEs to evade restrictions on the part of the banks.
Risks and limits
Sale-and-lease-back is only suitable for assets with stable market values. Moreover, the leasing arrangement must be viable for the long term.
Asset-based credit as a dynamic financing tool
Definition and how it works
Asset-based credit - also referred to as asset-based lending - constitutes a credit-based, object-related form of financing. In this case, assets - such as, machines, property, inventory or receivables - serve as collateral for a special loan. The line of credit is based on the recoverability and liquidity of these assets.
The financing parameters are continually adjusted to take account of the current value of the collateral. The credit institutions or special finance providers carry out regular assessments in order to dynamically steer the lending volume. The financing typically ranges between € 400,000 and € 5m.
Asset-based lending is used, in particular, for the financing of growth or innovation projects, for the pre-financing of orders and working capital needs, for the bridging of liquidity shortages, or in the case of restructuring and business reorganisation. This flexibility makes asset-based lending an essential component of modern transformation financing, especially in volatile markets.
Advantages and disadvantages
The advantages lie in the substance-based lending. The financing is oriented towards existing collateral and not exclusively on earnings metrics. Furthermore, the liquidity effect is quick. The capital can be swiftly made available once the assets have been measured. Moreover, the dynamic adaptation to changing business sizes and collateral values provides a high degree of scalability.
It is considered disadvantageous that, in times of crisis, the dependency on collateral value could become problematic if the market prices for machines or inventory fall. Besides, asset-based lending requires continuous monitoring and additional expenses for measuring the assets.
Integration of subsidies
things, KfW (a German government-owned development bank) has programmes that can support investment in energy efficiency, digitalisation and innovation with low-interest loans or guarantees. Further EU subsidies provide grants for transformation projects. Germany’s central innovation programme for SMEs (Zentrales Innovationsprogramm Mittelstand, ZIM) awards grants for research and development projects.
