Asset Based Lending

Asset Based Lending Contract User

What is Asset Based Lending ?

Asset based lending (ABL) looks at the assets of the business as a source of security for lending, typically in order to generate as much debt as affordable. Some lenders will effectively pawn-broke the assets without too much consideration of the affordability.

For good businesses, where affordability is strong, some ABL lenders will provide a cashflow-based loan on top of the ABL structure. If the assets don’t quite get to the debt quantum and the business can evidence the affordability, then the cashflow loan is an added facility that can differentiate one lender from another.

Types Of Business

ABL facilities are typically suited to businesses with turnover of £2.5m or more and borrowing requirements greater than £1m.

ABL facilities are put in place for a wide range of reasons, commonly for MBO/MBIs, acquisitions, exits, growth, refinance, turnaround and alongside equity.

A wide range of assets can be utilised within an ABL facility:

Debtor Book

The trade debtor book is the key part of an ABL facility. Lenders take a standard invoice finance approach to this, advancing up to 95% of book debt. This is however reduced by any “ineligibles” e.g. debt beyond 90 days, contractual debt, inter-company trading, credit notes etc. You can read more about invoice finance here.
Professionals Sat Down

Stock

Up to 75% of the realisable stock value is pretty typical. Lenders look for the Net Orderly Liquidated Value (NOLV) i.e. in a fire sale what is this stock worth after costs of selling it. We have seen lenders lend up to 100% of the actual market value because the stock has a defined market price and other than costs to recover the goods the lender is guaranteed to recover a set amount of money, therefore they are prepared to advance more in the first place.

On the other hand if you have a perishable, specialist, small item high value, or slow moving stock inventory then the amount advanced is going to be significantly lower.

The NOLV will give consideration to the recovery costs, and if the goods are spread across multiple locations then the recovery costs and recovered amount typically diminishes.

Property

Up to 75% Loan to value – however lenders differ in which value they use, some use market value, some market value allowing a 90 day sale period – these can be significantly different numbers.
Professionals Discussing Plan

Plan and Machinery

Up to 75% loan to value is achievable – some lenders will lend on the entire asset register, others will exclude assets below a set value or age.

Considerations

Lenders will always require some accounts to analyse – typically three years historic numbers and three years forecasts (P&L, Balance sheet and monthly cashflow) overlaid with the facilities in place. This work is normally outsourced to an accountant because they have all the forecasting software to hand. There is no point overloading the FD/FC with the additional work, it slows the process down and forecasting across a range of facilities and stress testing rate and other factors is not a 5-minute job.

Accurate forecasting is important because the forecasts will form the basis of the financial and performance covenants in the loan agreement – i.e. if the forecasts are wrong you could breach covenants which is not a great place to be. It is not uncommon for management to have a management set of forecasts and provide the lender with a worse set in order to low-ball covenants in the forecast and outperform them in reality, or have some cushion if things don’t go as planned.

During the life of the facility it is common to have quarterly reviews with the funder which will be a look back at the previous quarter’s performance especially with regards to the financial covenants and a look forward to the rest of the year.

Costs

In order to get to an offer of finance the lender typically requires a valuation and for a range of assets as above it’s going to cost several thousand pounds.

To set the facility up there is always an arrangement fee, sometimes these are split per facility i.e. asset finance £x, invoice finance £y etc. There will always be an interest rate on the debt provided and service charge on the invoice finance facility.

Most lenders charge early termination fees – these can be substantial, often they are to the extent of the income the lender would forego – so if your annual facility cost is £20k and you leave two years early the bill could be £40k, there is some negotiation to be had but not much, after all they don’t need to. Some facilities can be split up so that they can terminate in part, but this needs to be sorted out at the outset not negotiated on the way out.

There will be legal costs are concerned not only with putting the facility in place i.e. perfecting security but also in providing the advice to you as a client, reviewing the loan documents etc.

Some lenders will agree a flat fee for the invoice finance facility. Watch out for non-utilisation fees i.e. if you don’t use the facility you have to pay for it anyway.

Summary

ABL can be utilised to achieve some great growth and free up a lot of cash that would be otherwise trapped in the balance sheet. At the same time this is a sophisticated lending structure that takes borrowing to it’s feasible maximum in both affordability and asset cover therefore it is suited to businesses with a full time FD who can manage the facility and produce the reports and information the bank will require.

We know a lot about ABL, if you’d like to talk to us please send us an enquiry here.

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