Recession is upon us and the supply of money for small and medium-sized businesses has all but dried up.
Recession is upon us and the supply of money for small and medium-sized businesses has all but dried up. In such times of economic stress, lending against assets is more predictable and stable than lending against cash flow.
Asset-Based Lending (ABL) is one of the few beneficiaries, enabling transactions to be completed and businesses to refinance and execute viable turnaround plans as required. In volatile markets, ABL often takes the place of traditional forms of bank lending and it can be an extremely beneficial form of funding for small to medium-sized enterprises (SMEs).
ABL means different things to different people – some use the term to mean any form of funding aligned to an asset. At KBC Business Capital, we believe that “true” ABL is best described as the use of revolving loans against accounts receivable – more commonly referred to as invoice discounting – and inventory, with term loans secured against plant and machinery, freehold property – and more recently including intangible assets, such as brands, in the asset mix.
In this environment, there is a need for companies to operate with increased headroom within financial facilities – and ABL addresses that. The ABL businesses within financial institutions typically deliver a higher return, due to the level of income when combined with low credit losses. This is reflected in a lower capital weighting according to Basel II, where supported by historic data, ABLs may have more defaults but a lower level of absolute bad debts.
This means that during the current liquidity crisis and ongoing credit crunch, ABLs have a greater appetite and ability to make credit available than other banks or debt providers. The future holds significant growth for the ABL industry. This year may well be the year where ABL gained acceptance as a financing tool and it is likely that more investment grade customers who are falling through the ratings will start turning to ABL. Next year will be the year to watch.
According to the latest statistics from the Asset Based Finance Association (ABFA), more than 48,000 UK businesses now use some form of ABL as their chosen method of funding and, if historic growth rates are maintained, then more than £200 billion of UK sales will be financed using ABL in 2008, compared to just over £130 billion at the end of 2004. ABFA member organisations now provide more than £17 billion of funding to UK companies.
One of the key reasons for KBC Business Capital’s success is in taking time to understand its clients. It’s not just about knowing the sector and a company’s financial background, but also how a business is positioned with its customers and suppliers.
One example of the importance of understanding how a business is positioned with its customers and suppliers, is the £20 million management buy-out of Multipart Holdings, the Chorley-based specialist inventory management and supply chain logistics firm, which completed in June 2008.
We provided an imaginative revolving £15 million asset based lending package linked to accounts receivable and freehold property in support of the MBO. This innovative structure enabled Multipart, which has sales revenues in excess of £70 million, to build on the success of its award-wining IT system Msys.
With the lending markets in such a period of change, most of which has not been seen for a generation, these are growth times for ABL as more companies switch to this form of lending, because of its certainty, and banks look to achieve much higher returns on their capital.