By Stephen Drew, Head of Assurance and Business Services at the London office of Smith & Williamson

Asset-based lending (ABL) was once considered the lending of last resort. But times have changed and it is now a realistic alternative to conventional cashflow lending and attracts considerable interest.

What is ABL?

ABL generates finance against a company’s existing assets including stock, debtors, plant, machinery and property, usually incorporating factoring or invoice discounting. The due diligence process tends to be faster than traditional lending routes and funding can be provided more cheaply.

Most ABL is undertaken in conjunction with an invoice discounting facility, so it is most suitable for business-to-business transactions, where goods and services are supplied on credit. (Few lenders will look at businesses where the end customer is a consumer.)

Lending is usually available for up to 80-85% of debts. The service against which funds are being lent should be complete, the covenant of the debt should be ‘reasonable’ and not too old, and the debts shouldn’t be too concentrated, with lenders generally seeking a spread of good quality debtors.

Suitable businesses

The recruitment industry, particularly in relation to IT contracting, is a good example of where the use of ABL might be appropriate. Contractors are paid weekly but the companies using the contractors are unlikely to pay the recruitment agency for 60 to 90 days. The recruitment agency might therefore be able to borrow against these debts.

ABL may also be attractive to earlier stage, growth businesses because, as their sales increase, facilities also rise. But the reverse is also true and many established, stable businesses are seeing their ABL facilities diminish due to falling sales. Other factors to be aware of are that you need to keep detailed records of your assets and take account of potential seasonal issues. So, for example, if you buy in extra stock for Christmas but you don’t make the sales, this could leave a large dent in your finances.

Worth considering?

Sales-linked finance facilities such as invoice discounting and ABL have been proven to help businesses grow far faster than more restrictive, traditional overdraft facilities. A common misconception is that ABL is more expensive than traditional overdrafts but this isn’t usually the case. Costs vary enormously but generally speaking, the stronger the business the greater its negotiating power.

Large asset-backed lenders include PNC, Investec, Centric and GE Capital. For a full list of Asset Based Finance Association member firms, visit www.abfa.org.uk

For advice on whether asset-based lending might be a potential source of funds for your business, speak to Stephen Drew on 020 7131 4056 or email stephen.drew@smith.williamson.co.uk

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