Once seen as a last resort for businesses in trouble, but now increasingly a mainstream source of business finance, asset based lending is continuing to grow its popularity as companies look to secure new growth in the UK’s improving economy.
ABL, or asset based lending, is a form of secured lending where funds are advanced based on the value of the borrower’s assets. Although perceptions of this type of finance once linked it to small or distressed businesses who may otherwise struggle to secure bank loans, statistics compiled by the Asset Based Finance Association (ABFA) show a year-on-year increase in ABL-based advances across all business sizes for the past 10 years, bucking the trend of business lending in general.
So why are more and more UK businesses turning to ABLs?
1. No longer the ‘last resort’
The stigma that ABLs are a funder of last resort is an outdated perception. ABFA figures show that the UK’s larger businesses (>£100m turnover) raised £5.1bn of asset-based finance in the first quarter of 2014, a 16% increase on the previous year, and a fivefold rise over the past decade, showing that ABLs are increasingly being considered as a funding source for larger businesses.
2. Current market conditions are favourable
As larger banks are working to ensure compliance with new regulations and lending standards brought in after the financial crisis, bank loans have become harder to obtain. Businesses emerging from the recession that have been subject to constrictive cash flow control, and so have held off investment, are now looking for more flexible funding to grow. As such, ABLs offer a good balance of risk and accessibility for those which have the assets to borrow against.
3. Can be more flexible than traditional bank loans
Bank loans may be limited by a business’s existing debt or earnings capacity, whereas ABLs will focus more on the asset pool. As a result, bank loans
will tend to involve more detailed due diligence and include stricter financial covenants. Also, ABL facilities are typically designed to fluctuate and grow with the business and its assets, whereas traditional lending is generally more rigid. ABL facilities can also sit alongside and supplement a bank loan.
4. Can help businesses better manage cash flow
An ABL facility will require a business to maintain accurate records on the assets which are used to secure the debt. While this can mean businesses need to improve their processes, many see it as an incentive to create a well-oiled machine. Also, most lenders will provide a credit control service which can improve processes further and save on investments in other resources.
5. The number of providers and competition is increasing
The big clearing banks have approximately 80% of the ABL market in the UK but are now facing increasing competition from independent providers which are looking to increase their lending capabilities. The sector has seen a number of stock market flotations as competition increases and new players emerge with a view to getting a share of the growing market.
While ABL remains a key source of funding for companies looking to restructure, it’s clear it can also offer an alternative to or supplement traditional bank lending. However, it’s still a relatively new market in the UK with processes which are still evolving and borrowers or lenders should both ensure they are well-advised before signing up to facilities. If you would like to discuss any aspect of ABL funding, please contact Jamie Nellany, Associate, on 0131 222 9572 or JNellany@hbjgateley.com