ABL 101 – How can asset-based lending maximise the level of working capital available to SMEs?


Andrew Rutherford asset based lending

Designed to give owners and directors of SME businesses an insight into asset-based lending, Andrew Rutherford, Commercial Director at Arbuthnot Commercial Asset Based Lending looks at how ABL positions itself to overcome a working capital shortfall.

How has the pandemic affected businesses and caused cash flow / working capital shortages?

Almost all UK businesses have been impacted by Covid-19 in some way. Businesses that are dependent on personal interactions have been hit hardest, most notably, hospitality, accommodation, food services, air travel, and non-food retail.

We observed a dramatic shift towards online channels during the pandemic and an acceleration of digitisation by several years.

We have also seen manufacturing and wholesale businesses from our client base demonstrate considerable agility as they pivoted to provide critical PPE supplies, ventilators, and hand sanitisers, as well as shaping their distribution strategies and logistical processes in line with customer preferences and the prevailing market conditions.

Whatever the characteristics of a particular sector, if we cast our minds back to the start of lockdown, the matter of ensuring sufficient liquidity had emerged as a primary and pressing concern for every SME.

In April 2020, figures from UK Finance, the trade association for the UK banking and financial services sector, revealed that the level of invoices (across a sample of 20,000 businesses) had plummeted by around a third at the start of April 2020 and that turnover for these businesses only started to pick up again in July 2020.

At that point, many SMEs had recognised that their existing funding facilities were no longer fit for purpose to provide the amount of working capital that would enable them to reset and restart to meet the demands of the new environment.

This prompted business owners to engage with their advisers to discuss potential alternative funding options that would help them to consolidate their positions and explore growth opportunities, armed with fresh reserves of working capital.

As many business owners then discovered, there is a pragmatic and effective source of funding far closer to home than maybe expected – their own balance sheets.

How is asset-based lending (ABL) a good fit to help remedy a funding shortfall?

ABL is a flexible funding package that enables businesses to release the hidden value tied up in their balance sheet assets, including accounts receivable and stock, as well as plant & machinery and property.

Rather than viewing a debenture as an overall ‘basket of security’ to which a percentage can be applied across the board, a specialist asset-based lender takes into account specific Loan to Values (LTVs) against each asset class to maximise the level of funding available.

Combining both short- and long-term assets in this way provides a much more certain and flexible approach to financing the future needs of a business and can typically free up substantially greater value than traditional bank lending.

In addition, since ABL does not rely on historic trading performance, but on the quality of the collateral, fewer financial covenants are required.

Accounts receivable and stock finance provide a constant supply of ongoing funding that will grow in line with the business and additional term loans based on plant & machinery and property can release even more cash for further working capital and investment.

Such is the versatility of an ABL facility that it can be used in support of a variety of scenarios, such as meeting the initial transaction consideration for a bolt-on acquisition of a target complementary business, a refinance for growth, a corporate carve out/disposal, or a management buy-out or buy-in.

In situations where a business has a strong EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), it may also be possible to access a cashflow loan to provide an even greater level of headroom.

During the pandemic, access to BBLs, CBILs, and other government-backed lending schemes also played an essential part in augmenting ABL facilities, allowing businesses to trade out of their current positions and emerge stronger.

Like so many of the business lessons learned from the pandemic, maximising the use of the balance sheet is far much more than a short-term ‘fix’.

ABL provides a dependable source of funding that is here for the long-term and that will enable businesses to meet their future plans with greater resilience and confidence.