• The stars align for asset based lending

The stars align for asset based lending

28 April 2021

As the UK recovers from the effects of the COVID-19 pandemic, many businesses will be considering the long-term impact on their business, its market and its recovery in a post lockdown economy. As government initiatives scale back and HMRC deferments crystallise, the challenge for businesses large and small will be access to sufficient liquidity to provide adequate headroom as they recover and grow.

The role of asset based lending in helping businesses to grow

In a normalised market, Asset Based Lending (“ABL”) has a significant role to play. Now following the pandemic and in times of change, access to funding through traditional routes may prove more difficult to access and alternative lenders who specialise in ABL are perfectly primed to support business across the UK.

Benefits of ABL:

  • Improved liquidity           - unlocking value in the balance sheet
  • Committed facilities        - RCF and Senior Debt options may be limited
  • More flexible                   - tracks growth and seasonality of the business
  • Cost of funds                  - typically lower than other funding options
  • Fewer covenants            - covenant light with visible and flexible terms
  • Speed of execution        - less DD than other debt options and quicker credit decisions

The ABL market has evolved exponentially over the last 30 years. It is no longer viewed as the factoring option of last resort. Indeed, some boutique lenders have grown into sophisticated financial institutions offering Cash Flow Term Loans, Mezzanine Debt, Unitranche, Recurring Revenue Facilities, M&E RCF, Inventory only solutions in addition to the traditional ABL facilities leveraging the value in Fixed and Current Assets on the
Balance Sheet.

The impact of the pandemic on many businesses has seen revenues fall, cash and profits eroded and increasing leverage. The pressure on lenders and borrowers to determine the level of ongoing support is increasing. Historically strong performing businesses have seen access to debt curtailed as they breach covenants and forgiveness of these breaches can only go on for so long. Other businesses that have thrived (tech, e-commerce) may have suffered from their own success, as increased working capital requirements may not always be forthcoming from the incumbent lender.

ABL is able to “bridge” the gap in the debt market, providing businesses with much needed access to liquidity and as secured lenders will have more appetite to support than Profit or Cash Flow driven lenders can.  

Key considerations for businesses when navigating the
ABL options

  • Are your current facilities fit for purpose and do they support greater liquidity?
  • Do you have a robust go to market strategy and approach with potential new lenders?
  • Are you negotiating on the right terms and pricing?
  • How are you approaching event driven transactions, for example:
    • M&A
    • MBO/MBI
    • Full or Partial shareholder exits
    • Repayment of Loan Notes

A specialist ABL advisory service

With over 150 different lenders in the market, securing the best possible outcome for any business is a daunting and time-consuming process. Our ABL Advisory team can support management teams through the process of selection with a full wing-to-wing service or a light touch review thus enabling management to focus on what they do best…..running their business.

If you have any questions on regarding what you have read, please contact Drew Johnson who will be happy to help you. You may also be interested in reading our Annual working capital study and The business interruption verdict: issues and actions.