As banking facilities are being withdrawn and re-priced, asset-based lenders can offer business owners more certainty. 

As banking facilities are being withdrawn and re-priced, asset-based lenders can offer business owners more certainty.

Right now, there aren’t many lenders who can say that they’ve got five deals on the table that they’re hoping to close in less than a week. Phil Woodward, however, is in that enviable position.  

The founding director of Leumi ABL is frank about the roller-coaster year to date. He says conditions are now on the up, with fewer distressed deals and more MBO/MBI growth capital transactions and “sensible” refinancings reaching his desk.

Although deal flow has been sporadic, Woodward asserts that the “void” in traditional lending has been constant and that asset-based lenders (ABLs) have moved to fill this gap. By and large, he says that the government’s attempts earlier this year to flood the banks with cash through quantitative easing have been ineffective.

The wells run dry

It’s clear, Woodward says, that debt finance has all but dried up over the past six to 18 months and could be a long time in returning: “I don’t think quantitative easing has found its way out into the market yet, or filtered down to the mid-market businesses that we deal with.”

Leumi ABL provides funding of up to £25 million to businesses and is one of the largest subsidiaries of Bank Leumi UK Plc, which has been operating in the UK since 1902. Leading the ABL division, Woodward has observed a fundamental shift in the corporate finance market, with ABL products being used to ease cash flow pressures as more traditional sources of finance, such as overdraft facilities and loans, are withdrawn or re-priced.

Woodward suggests, “Banks aren’t lending out on overdrafts like they used to. The Bank of England’s requirements to meet liquidity ratios and to go through stress testing have meant that debt providers are less willing to lend in traditional ways. They are pushing businesses to look at ABL as a form of lending rather than their overdraft because it is more capital efficient for banks to have funding under ABL than via an overdraft banner – it makes sense for their own balance sheet restructuring.”

Figures from the Asset Based Finance Association strengthen the view that ABL is growing faster than traditional lending at this time. The ABFA’s findings show that asset-based lenders advanced more than £17 billion to UK businesses last year, of which more than £1.6 billion was advanced on stock, a 168 per cent increase on the previous year.  

Woodward notes, “ABLs have pushed themselves forward to fill the void left behind by traditional bank lending not being available. In fact, it’s not just the banks, as companies themselves are looking to make greater use of the assets on their balance sheets by releasing the liquidity tied up in them.”

Who do you trust?

A poll of 5,000 members of the Federation of Small Businesses taken in December found 30 per cent had seen an increase in the cost of new and existing loans. The findings reflect the sentiment of some business owners who are finding it hard to judge where they stand with their bankers.

For those who are doubtful, Woodward suggests that ABL can offer more certainty for business owners as, unlike an overdraft facility, which is covenant based and repayable on demand, ABL is based on asset values and collateral formulae.

“In this way, lenders are able to predict cash positions in line with forecasts. In short, it allows business owners to concentrate on the business rather than the relationship with their bank and their cash flow.”