ABL - the missing piece?
Peter Ewen, reveals why businesses should consider ABL as a method of funding in these challenging economic times.
The well publicised ‘credit crunch’ has been grabbing headline after headline for some time now. Traditional lenders such as high street banks have tightened overdraft limits and loan criteria. Peter Ewen explains how you could be forgiven for thinking that getting funding for essential business growth or cashflow support was impossible.
While it is true that the usual routes to business finance are undoubtedly harder at the moment, there are alternatives. Sometimes the key to unlocking funds is right under your nose: in your business’ assets. One of the fastest growing areas of business finance is Asset Based Lending (ABL). The Invoice and Asset Based Lending market has truly come of age and there has never been a wider range of services available to unlock the financial potential of individual businesses. In fact the Asset Based Finance Association (ABFA) reported that ABL had grown 30 per cent in 2007.
ABL generates finance against a company’s existing assets, be that stock, plant and machinery or property and sometimes even less tangible elements such as intellectual property or brands. This can be used to support those defining business transitions such as expansion, takeovers, MBI, MBOs or other activites that require funding. In contrast to off-the-shelf financial services, the best ABL packages are bespoke, tailored to the individual needs of the business.
The benefits of ABL
Repayments are an ever-present issue with a traditional loan or investment structure and there is little scope for securing additional finance through the same arrangement. In contrast, an ABL facility actually grows with the business, providing the much-needed headroom to focus on real business issues. This characteristic is making ABL an increasingly attractive complement to traditional funding structures, with many deal advisers and private equity firms seeking a combination of the two.
ABL is a particularly attractive acquisition funding option because it allows a management team to retain control post-deal, without having to surrender some of the business to a venture capitalist or private equity house. In comparison ABL is much less intrusive, since it releases the value of the business’ assets to create the funding.
Unlike other forms of finance, such as a bank loan or venture capital investment, the advantages of ABL don’t just extend to facilitating the original deal. In fact, this form of finance really comes into its own in the months and years following completion. If the acquisition funding is provided on a revolving basis, via receivables and stock (rather than on a reducing or amortising term basis) the facility can continue to grow post-acquisition, in line with the company’s sales. This reduces the strain on a company’s cashflow during the often-difficult post-deal phase.
Choosing an Asset Based Lender
The best Asset Based Lenders are dedicated to building lasting relationships with clients, often acting as a trusted advisor for a business’ management team during an acquisition or a similarly trying period.
With a strong relationship and understanding of the client’s business in place, an Asset Based Lender can often coach and guide a client through the woods by anticipating common pitfalls and offering creative solutions. This dedication to client service is often a decisive, if intangible, element to deal success.
The team at Venture Finance has extensive ABL experience at both SME and the larger corporate end of the market, and is made up of passionate people who pride themselves on going the extra mile for clients. Far from treating them like anonymous account numbers, we know all our clients as individual people. Key to this is the number of clients that each client manager has in their portfolio – at Venture, the figure is typically half that of the banks’. This personalised approach ensures good understanding of the nuances and needs of a business.
Conclusion: the tip of the iceberg
There has never been a better time for businesses to start realising the benefits of flexible alternative funding options, such as ABL. The current credit conditions are forcing more and more businesses to look beyond traditional sources of finance. What’s more, the Government has recently scrapped the assignment ban on SMEs using Invoice Finance (often to assist with cashflow) while they work on lucrative local government contracts.
It does not end there: the funding provided under the Small Firms Loan Guarantee (SFLG), available to all businesses under £5.6m turnover, was increased in this year’s budget. All of these options present flexible, ‘credit crunch resistant’ methods of funding for UK businesses and should be seriously considered.