Sweating Your Assets

Asset-based lending is enjoying a rise in popularity as businesses look to release cash to grow.  

The most recent UK Finance figures show that, following the end of the government’s emergency funding measures to businesses, the uptake of asset-based lending (ABL) and invoice finance rose by 11 per cent in Q3 2021, and by a further five per cent in the final quarter of 2021. Clearly asset-based lending is now an established part of the funding mix for an increasing number of businesses. But what is it, and who can use it?  

In essence, ABL is about leveraging a selection of unencumbered assets within the company balance sheet to secure an injection of working capital or cash into the business.  

And typically that will effectively starts with the debtor book, which is the most liquid asset you can use. After that, you start to move out onto the balance sheet to less easy to leverage assets– including stock or plant and machinery. 

Typically ABL lenders will consider lending against the value of:  

  • Machinery 
  • Equipment 
  • Property 
  • Stock 
  • Vehicles (typically not with any HP attached) 
  • Some types of intellectual property 

However, borrower beware: As with all of these things, the value of these assets is not determined by their value to the business; rather it is related to how much you could get for them on the open market tomorrow. That means the lenders will value property higher than, say, a car or stock. 

The finance factor 

As for who should consider ABL, it’s ideal for businesses that are looking to release working capital to expand, restructure or re-finance. And it helps you to get an additional amount of cash that you wouldn’t otherwise be able to access.  

The way that lenders work is that they want security now, and it’s rare to find anything that’s unsecured. So given that, ABL is a great way to get working capital funding into the business using existing assets, rather than having to pledge additional assets like personal guarantees. 

So how does it work? Well, take this example: if you’re a business and you are owed £1 million by your customers, effectively you would raise those invoices – once the work has been completed which is really important with regard to this product or any services that have been delivered.  

Copies of those invoices will go to your customers in the usual way, but you would also send copies directly to the funder.  That funder would then buy through a debenture £1 million worth of invoices, and they would fix what is very much like an overdraft limit, typically could be at 80% so they would mark an overdraft limit or a re-limit of £800,000 which the client could borrow.   

Crucially, the company using the facility isn’t obliged to borrow anything: they could borrow anything from zero to the full £800k.  Once the customers settle the invoice, that cash then goes into a trust account, with any borrowing then repaid with the balance returning back to borrowers less any fees.   

But remember: it’s worth knowing the basics. Confusion sometimes arises because normally 80/85/90% of the value of the debtor book can be made available to the client immediately. The 20/15/10% remaining balance is not the costs of the finance however – it is made available to the client business once the debtors pay, less the finance provider’s charges. 

Understanding the financing options open to your business can make a big difference to your growth story.  We’re right here for all your needs, and you can contact us for help and support in a number of areas, from tax and payroll to accounting and banking.