Asset Based Lending (‘ABL’) supports businesses to raise additional funds when they are seeking to acquire or merge with others. It can also be very helpful for management buyouts. It can also be helpful for succession planning in family businesses where parents are looking to releasing equity from assets for their own retirement fund.
So why is it helpful and what does an ABL look like?
An ABL facility is a mixture of the following products;
- Confidential Invoice Discounting – using your debtor book to raise funds
- Hire Purchase/Leasing – raising funds on those assets that the company has that are free from finance
- Property Finance – refinancing or raising financing on the property where the business trades.
- Inventory Finance – raising finance on the stock the company holds.
When a business considers raising funds to acquire or to merge, it should first consider the assets it holds on its balance sheet. Good financial advisors should be looking to extract as much funding through this mechanism rather than just raising more fresh debt. This is common practice in the UK and Europe for both short term and longer-term funding.
The missed opportunity costs should be borne in mind when factoring in the benefits of acquiring a business and the longer-term impact on profits and growth. Invoice discounting is an excellent way to keep cashflow positive while a business goes through the M&A process. Asset Based Lending facilities can be used by well-established businesses looking to grow and for newly formed businesses that are acquiring established businesses by leveraging from their debtor book to raise funds for the acquisition.
Ireland and Irish businesses are now emerging from nearly a decade of recession and while business owners have shown a reluctance to invest in their business until they saw a consistency in the market they are now seeing consistency in their trading performances. Entrepreneurs can see an uplift and to make that jump they will have to acquire or merge with a competitor. Family businesses are now having talks again around the dinner tables about succession planning or passing over ownership to the next tier to take advantage of the positive economic factors despite Brexit.
In many cases, obtaining a loan from a mainstream bank can be a drawn-out process for companies looking to finance an acquisition. Traditional lenders may also be unwilling to support this activity or buy into the growth story due to their own internal obstacles or policies. In contrast, ABL provides a more flexible and suitable option for firms without a great amount of cash on their balance sheets , or for companies where cashflow levels tend to fluctuate.
ABL can also be a favourable alternative for the more machine-led firms, given the large amount of machinery locked up within their businesses, not to mention the value of a business’s debtors ledger or any commercial property. As a more specialised offering, ABL providers can also offer advice on how to maximise the liquidity of any items on a firm’s balance sheet and help to minimise the risks of the deal’s execution.
Acquisitions in any sector are likely to experience unforeseen problems, particularly within the initial stages of the process. The focus on assets offered by ABL providers, however, means that this funding option is better able to accommodate any bumps in the road, and is flexible enough to cope with the needs of a growing business. For all these reasons, if a business is thinking about an acquisition, it should look in to asset-based lending as a flexible alternative to traditional finance, and this is where Capitalflow can be of assistance.
A recently completed Asset Based Finance deal is with Berkley Recruitment. See below for further information on the deal:
This Article was written by Philip Healy, Sales Director, Asset Based Lending, Capitalflow.