Funding growth out of the pandemic with asset based lending

With the economy returning to growth, businesses across the UK will be looking at ways to fund their own recovery and growth plans. Allan Graham, Michael Bills and Vijay Merchant from global management consultancy Kroll outline how asset based lending can provide a unique role in supporting businesses. 

The asset based lending (ABL) approach has always been viewed as a flexible and accessible option for businesses looking to raise additional working capital and liquidity. 

The variety and funding appetite of lenders has grown exponentially over recent years and lenders continue to adapt to provide flexible, innovative and competitive lending packages to their borrowers, despite the re-introduction of HMRC’s secondary preferential status ahead of other floating charge holders for amounts owed under VAT, PAYE and employee NICs from December 1, 2020.

Successfully funding growth as trading for businesses returns to previous levels will depend on identifying the right funding partner to provide the optimal facility structure and fully understanding the facility terms in order to minimise cash lock-up.

ABL provides funding against specific assets of a business at a pre-defined advance rate. These assets predominantly include book debts, inventory, plant and machinery and can extend to property, intellectual property and brands. As the value of a business’s assets grows, so does the level of funding that can be raised against it, making it an ideal funding solution for a business trading out of restrictions and managing the working capital impact of an increase in activity levels. 

In comparison to traditional financing options, where lenders look at historic and future cash flow and profitability, asset based lending focuses on the value in the assets which are likely to maintain value, even in times of declining financial performance. 

As a result, asset based lending tends to be financial covenant light with a greater focus on the value in the asset base and its revolving nature. In the current economic climate, this should provide a crucial aid to businesses which may struggle to meet existing debt covenants and generate additional funding given the impact the pandemic has had on trading. 

Three reasons why businesses and their owners should take a closer look at asset based lending:

• Many ABL providers move quickly and are taking increasingly flexible and supportive stances on funding structures, even where recent financial performance of a borrower has been poor. Underwriting can take weeks not months and lending can have lower costs than alternative sources;
• The ABL approach is relatively free of covenants which are often associated with cash flow lending and term loans;
• Liquidity is improved and cash lock-up reduced when used appropriately. This in turn can stabilise a business as it either comes out of a difficult period or is experiencing dramatic growth, as many may now face as the economic shackles come off. 

Whilst there are signs for optimism as the economy recovers, growth for businesses must be treated with caution and we are advising all of the management teams with which we are working to consider the working capital implications of recent growth carefully. Overtrading can cause as much cash pressure as the alternative. Investment should be made in financial forecast models that can support decision making and identify cash pressure points.

To alleviate any cash pressure, businesses should consider asset based lending as an option to minimise cash lock-up and appropriately fund their growth. The inherent flexibility of asset based lending makes it an exciting finance tool and a cost-effective solution for business owners to access capital when navigating through the challenges of the pandemic and ultimately create value in the future.