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CFOs are working hard to vary their companies' funding sources.
Tim Burke, CFO Europe Magazine
April 7, 2008
No one said it would be easy. As the credit crunch continues, several new reports suggest that CFOs are working harder than ever to diversify their companies' sources of funding. And money is still available, though firms may have to look slightly farther afield.
Recent results from the Asset Based Finance Association (ABFA), a UK trade body for financiers who lend against assets ranging from factories to unpaid invoices, show that its members lent £15.7 billion (€20.1 billion) to 48,000 companies in 2007, a 16% rise on the previous year. With suitable gusto, the organisation's chief executive described the industry as "a lifeline" for businesses that find lending conditions limited.
One recent convert is IBP, a UK manufacturer of copper fittings for plumbers and engineers. In February this year, the company set up a new £45m credit facility with asset-based lender Landsbanki Commercial Finance to cover working capital and investment finance for its businesses across Europe. According to Jon Evans, IBP's finance director, using an asset-based lending line linked to the current value of the group's inventory made sense, as the daily price movements of copper mean that IBP's "working capital requirements can fluctuate significantly."
The ABFA's statistics are confirmed by a recent study from law firm DLA Piper that suggests the credit crunch is encouraging companies to diversify their sources of financing. Less than one-third of the 200 global companies responding to the survey said that they rely exclusively on their relationship banks. "It is conceivable that the credit crisis may act as a catalyst for the development of more creative funding techniques," the study claims.
But this doesn't mean that the banks, currently laid low by the credit crunch, will slip too far down the pecking order of financing sources. In fact, according to a recently published survey by JPMorgan Asset Management, the long-running trend for companies to rationalise banking relationships appears to have reversed. The share of European companies with five or fewer banking relationships is shrinking as financial market turmoil encourages finance chiefs to spread risk by increasing the number of banks that they do business with. (See "Shopping Around" at the end of this article.) Put another way, CFOs are slicing a shrinking pie into a greater number of pieces.