Asking your lender to increase your overdraft limit is not as simple as it used to be. Shona Campbell, who leads KPMG’s Enterprise Financing team in Scotland, draws the attention of small and medium sized businesses to asset based lending.
Cash is the lifeblood of any business. Businesses need money to trade and grow, and getting a loan from a bank is the traditional means of accessing cash. A typical bank debt structure would comprise a term loan to meet the longer term funding requirements of a business supplemented by an overdraft to meet the day to day working capital needs.
The key benefit of an overdraft is its convenience. The headroom it provides is like a security blanket for the unexpected. However, most growing businesses consume cash and at some stage this headroom may not be sufficient to meet future working capital fluctuations.
As many business have discovered, though, asking your current lender to increase your overdraft limit in today’s lending environment is not as simple as it used to be.
Asset based lending, often referred to by the acronym “ABL”, is an alternative to the traditional bank debt structures and is ideally suited to funding business growth.
ABL, primarily invoice factoring, used to be seen as something to be avoided by many businesses and only applicable to turnaround or challenging situations. However, the UK ABL market has changed significantly in recent years with the products becoming more sophisticated and widely accepted, as is the case in the US where ABL has for some time been a considerable source of debt financing. In 2016 the total ABL facilities provided to UK Business grew by 16% to £22.2bn.
The most common type of ABL is invoice financing whereby a business will borrow against its trade debtor book, but ABL is burgeoning and its scope has spread to other assets in the balance sheet, even including intangible assets such as brands and intellectual property in some cases.
ABL is now considered a mainstream financing source and any asset rich business with a need for additional cash flow flexibility should consider it as a potential funding option. ABL can supplement or replace existing lending facilities and help fund new projects and growth. For many strongly performing businesses it is the product of choice.
However, there is still an air of mystery around ABL and some businesses, particularly SMEs, are not aware that it provides a credible solution for sourcing additional cash. It is a versatile product and is cheaper than many other forms of debt.
One business we worked with recently had an increasing working capital need arising from a projected growth in sales. However, the incumbent lender had reservations about increasing its facilities to meet the forecast requirement. We worked with the business and identified that the asset rich balance sheet was ideal for ABL. The existing lender put forward a revised funding package based upon an invoice financing facility, but we realised that the nature of the stock was also suitable for ABL. As a result, we introduced the business to a short list of ABL lenders and subsequently assisted management to assess the offers received and negotiate final terms. The outcome was that the company secured increased borrowing on market competitive terms via an ABL facility based upon stock and plant, as well as trade debtors.
There is a myriad of products and lenders in the UK ABL market which means it can be difficult and time consuming to navigate. Speaking to an advisor can help a business gain an understanding of whether ABL is appropriate to their circumstances and how an ABL facility would work in practice.
We often meet with businesses on this basis to assess outline debt capacity and the ways in which an ABL facility could be structured. Knowledge of the market also means that an advisor can help identify those lenders best suited to a particular business.
It is a dynamic time in the UK lending market place and business owners should make sure that they consider all debt funding options appropriate to their businesses, including ABL.