Award-winning IT entrepreneur, Kate Craig-Wood is founder of hosting company, Memset. Memset has been benefiting from the soaring demand for cloud computing, which allows users to run programs and store information remotely, eliminating the cost of operating the equipment themselves. But with big ambitions, and no access to capital, Craig-Wood recently secured asset-based finance. This is how she did it.

Memset hosts 20,000 of Britain’s largest and busiest Web sites, and provides infrastructure for businesses of all sizes and sectors, including the BBC, Hilton Hotels, TrueKnowledge.com and Taste Card.

The business has grown organically from an initial investment of £2,000 in 2002 by brother and sister founders Kate and Nick Craig-Wood. It remains a family business and they have sold no equity.

Despite having had steady, profitable growth for 9 years and ranked in the top ten of their industry of ~200 for financial and commercial strength, the best Barclays could offer without having to guarantee the debt with her own home, was a £200,000 loan – provided that the cash was left in a deposit account with them!

Given the banks’ dogged insistence on personal guarantees, Kate decided to take a multi-pronged approach; securing flexible asset-based finance, tapping friends and family via a non-dilutive preference share issue and, basically, saving up!

Flexible Asset-Based Finance

With Barclays and Lloyds continuing to give Craig-Wood conflicting advice, she decided to try RBS. Whilst they were very upfront that they too wouldn’t lend capital without a personal guarantee, so they bought Lombard to the table who offered asset-based finance.

Asset-based lending is when an organisation lends money to a business against their property, plant, machinery or stock. In Memset’s case they spend a huge amount every month on server equipment – their main growth capital cost.

When it came to computer equipment, Lombard were really easy to deal with, and Craig-Wood managed to secure a £400k facility to draw down on. While Memset already has a leasing facility with their main provider, Dell, they frequently source components separately and other non-Dell items such as routing equipment. They can now round up these “odds and ends” at the end of the quarter and submit them to Lombard’s en-masse.

Securing Finance

Whilst Craig-Wood had to conform to Lombard’s rules, some of which could be a little more flexible, they were particularly quick in sorting out the finance, giving Memset the opportunity to continue their strong growth, something they wouldn’t have had the chance to do with the bank.

Although the charges and interest rates for asset-based lending are sometimes a little higher than a traditional loan from a bank, in Memset’s case, Lombard came up with an attractive offer, including a 1% Government “cash-back” sweetener.  Further, the service is particularly convenient and the repayments are built straight into their system, so they couldn’t have found it any easier to secure finance.

Pros & Cons of Asset-Based Finance

Having the money to draw down on IT equipment has enabled Memset to free up cash to help drive growth in other areas of the business.  And asset-based lending enabled Craig-Wood to get extra finance sorted quickly.

However, unless you have a strong balance sheet, you are unlikely to secure asset-based finance as there is not a lot of security for the lender. Craig-Wood suggests making sure your balance sheet looks good before approaching the lenders. She avoided taking money out of the business for the last few years and managed to build up an impressive £1m bank balance before setting the ball rolling to raise finance.

While obviously useful in itself, a strong bank balance was also been a powerful facilitator for the asset-based lending approach. Lombard were greatly comforted by Memset’s clear demonstration of huge profitability and cash-generation power.