Asset based lending - an alternative route?

In the face of global political and economic headwinds, many businesses are reassessing the resilience of their funding package. At the same time, global supply chain challenges may encourage businesses to hold more goods and stock, all of which must be funded. As a result businesses may be considering asset based lending (ABL) for the first time.

With ABL, the available facility is tied to the value of a business's assets rather than its credit rating or a multiple of EBITDA. Consequently, it continues to be available despite temporary market conditions. ABL may be as simple as invoice discounting, to release the value of trade receivables or a fuller solution involving revolving loan facilities against fast moving collateral such as inventory and receivables and longer term loan facilities against fixed assets such as real estate and machinery and may stretch into other asset classes such as intellectual property.

Not all businesses are suitable for all ABL lenders. For example;

• if you have just a few large customers, there may be a limit on the concentration risk that a lender is prepared to take
• if you use trade finance to import goods and title to the goods remains with the trade financier, the interaction of the trade finance and ABL will need careful attention
• similarly, if goods that you purchase are subject to retention of title in favour of the supplier, you won't be able to onward supply those goods on retention of title terms yourself and they may not always be suitable for ABL funding.

ABL specialist advisers such as Addleshaw Goddard know the idiosyncrasies of the market and can guide you to achieve the optimal funding package.

The focus of ABL on the underlying assets means that, compared to traditional funding models, you should expect some initial time investment to set up the funding package:

• initial and periodic (but infrequent) independent valuations of long term assets (such as real estate and plant and machinery) will be required
• the value of current assets will need to be confirmed more frequently (weekly or monthly) and the lender will need access to accurate sales and purchase ledgers
• the lender will need to know where goods are held at all times and may need to conduct due diligence on your warehousing 
• expect some initial interaction with each of your landlords, carriers of significant volumes of goods, your insurers and your clearing bank. 

These preparatory steps may be a small price to pay if ABL is a good fit for your business. ABL is typically competitively priced and provides access to finance during periods of market volatility. It is excellent for growing businesses, since the debt can increase as the volume of receivables and inventory increase.  Since ABL is primarily focused on the underlying assets, it tends to be light on covenants compared to other facilities.

If you'd like to discuss ABL options in more detail please contact Mike Davison or Lauren Priest-Stephens.