The COVID-19 pandemic has had a significant and detrimental impact upon the majority of the country’s businesses, curtailing turnover and profitability levels.
As we start to emerge from the onerous trading restrictions, the initial signs point towards a more positive outlook with the hope of normal trading activity returning in the short to medium term. Whilst government support schemes and lender and creditor support have provided a substantial lifeline for most businesses throughout the pandemic, the majority of these schemes are due to wind down in the coming months.
Businesses will once again have to be self-reliant and access to liquidity will become paramount. Following a period of depleted trading, many businesses are likely to be entering this phase of growth with weakened balance sheets and cash pressures compounded by the need to repay tax, landlord and supplier arrears and increased debt-servicing costs from government support measures.
Coupled with the challenges of funding the working capital of a growing business, Asset Based Lending or ABL will provide a unique role in supporting businesses.
ABL has always been viewed as a flexible and accessible option for businesses looking to raise additional working capital and liquidity. The variety and funding appetite of lenders has grown exponentially over recent years and lenders continue to adapt to provide flexible, innovative and competitive lending packages to their borrowers, despite the re-introduction of HMRC’s secondary preferential status ahead of other floating charge holders for amounts owed under VAT, PAYE and employee NICs from December 1, 2020.
Successfully funding growth as trading for businesses returns to previous levels will depend on identifying the right funding partner to provide the optimal facility structure and fully understanding the facility terms in order to minimize cash lock-up.
ABL provides funding against specific assets of a business at a pre-defined advance rate. These assets predominantly include book debts, inventory, plant and machinery and can extend to property, intellectual property and brands. As the value of a business’s assets grows, so does the level of funding that can be raised against it, making it an ideal funding solution for a business trading out of restrictions and managing the working capital impact of an increase in activity levels.
In comparison to traditional financing options, where lenders look at historic and future cash flow and profitability, ABL focuses on the value in the assets which are likely to maintain value, even in times of declining financial performance.
As a result, ABL tends to be financial covenant light with a greater focus on the value in the asset base and its revolving nature. In the current economic climate, this should provide a crucial aid to businesses which may struggle to meet existing debt covenants and generate additional funding given the impact the pandemic has had on trading.
There are a few key reasons why we are encouraging businesses and their owners to take a closer look at ABL:
- Many ABL providers move quickly and are taking increasingly flexible and supportive stances on funding structures, even where recent financial performance of a borrower has been poor. Underwriting can take weeks not months and lending can have lower costs than alternative sources;
- The ABL approach is relatively free of covenants which are often associated with cash flow lending and term loans; and
- Liquidity is improved and cash lock-up reduced when used appropriately. This in turn can stabilise a business as it either comes out of a difficult period or is experiencing dramatic growth, as many may now face as the economic shackles come off.
Whilst there are signs for optimism as the economy recovers, growth for businesses must be treated with caution and we are advising all of the management teams with which we are working to consider the working capital implications of recent growth carefully. Overtrading can cause as much cash pressure as the alternative. Investment should be made in financial forecast models that can support decision making and identify cash pressure points. To alleviate any cash pressure, businesses should consider ABL as an option to minimise cash lock-up and appropriately fund their growth. The inherent flexibility of ABL makes it an exciting finance tool and a cost-effective solution for business owners to access capital when navigating through the challenges of the pandemic and ultimately create value in the future.
