Asset based lending (ABL) is a bespoke and flexible funding solution which allows a borrower to release fully secured debt funding against a variety of assets in its balance sheet. Typically, an ABL facility will comprise of revolving credit facilities secured against a borrower’s eligible receivables and inventory, together with repaying term loan facilities provided against property and plant and machinery.
Given the fully asset-secured nature of the facilities, lenders are often able to maximise a borrower’s debt capacity beyond other forms of debt structures, and allow for greater degrees of leverage, all at reduced lending margins.
Mainstream ABL lenders are able to enhance the core ABL debt structure with additional trade and ancillary facilities, thus providing end-to-end working capital solutions with associated interest rate and currency hedging instruments in support.
Asset-based lending can be a much-needed source of capital for companies that face a range of needs including:
ABL protects equity in the business by leveraging assets more effectively, allowing firms to raise significant funds without sacrificing equity. It offers a lot of flexibility as it can increase or decrease with changes in the funding base and can be useful for businesses that face seasonal peaks or industry cycles where other sources of funding may be too inflexible to meet spikes in working capital.
It can be used as part of a wider funding package to improve working capital and support growth plans and is also popular because it can offer lower funding costs than traditional funding methods, whilst releasing significantly more capital.
There are very few downsides. ABL borrowers are likely to be required to provide more comprehensive management information to lenders in order to evidence the collateral securing the facility. However, this tends to become largely routine for ABL borrowers and, given the lender’s focus on the performance of working capital assets, these reporting obligations can frequently represent an opportunity for borrowers to understand the shortcomings and opportunities in better-managing their working capital cycle.
ABL is therefore an extremely effective tool which unlocks the capital tied up in a business’ balance sheet and is a product that helps support its working capital. It is best suited to businesses that have asset-heavy balance sheets and is typically popular amongst businesses involved in the manufacturing, services, wholesale and distribution sectors. It can accommodate any level of debt requirement, with facilities provided to relatively modest SMEs through to larger, more complex structures including syndicated, multi-national, multi-currency and multi-asset facilities.
Today, it is being used by businesses to support a range of circumstances in order to support their business ambitions. Used alongside other working capital products, including trade, receivables, purchase and asset finance, ABL can open the door to new opportunities for businesses and help them prosper.