Asset-Based Lending (ABL) is a flexible financing solution that allows businesses in the UK to unlock capital tied up in their assets. Unlike traditional loans that rely heavily on a company’s creditworthiness or profitability, ABL focuses on the value of tangible and intangible assets.

What is Asset-Based Lending?

ABL is a type of secured lending where a business borrows money against the value of its assets, such as accounts receivable, inventory, machinery, equipment, or property. The lender provides a loan or revolving credit facility with the borrowing amount tied to a percentage of the asset’s appraised value (known as the ‘advance rate’).

For instance, a lender might advance 80-90% of the value of accounts receivable or up to 100% of the Net Orderly Liquidation Value (NOLV) of stock. Many ABLs also now come with the ability to fund alongside a cashflow term loan which can be used where there is a shortfall in funding between the availability derived from the assets and the total borrowing requirement.

Who Uses ABL in the UK?

ABL is popular among manufacturers, wholesalers, and retailers, particularly in sectors like construction, logistics, and retail, where assets like inventory and receivables are significant. It’s also used in restructuring or insolvency scenarios to stabilise cash flow.

How Does ABL Work?

In the UK, ABL typically involves the following steps:

1) Asset Valuation

The lender assesses the business’s assets to determine their quality, liquidity, and marketability. Accounts receivable, for example, are evaluated based on debtor creditworthiness and payment terms.

2) Facility Agreement

The lender offers a credit facility, often a revolving line of credit, where the borrowing limit fluctuates based on the value of the assets. This flexibility distinguishes ABL from fixed-term loans with any facility growing as these asset values increase supporting investment in working capital.

3) Monitoring and Reporting

Lenders require regular updates on asset values, such as monthly accounts receivable reports, to ensure the collateral supports the loan.

4) Repayment

The borrower repays the loan through cash flow generated from operations, often directly from collections on receivables.

The Benefits of ABL

ABL offers several advantages for UK businesses:

•  Accessibility: There is a large ABL market in the UK from high street banks to alternative ABL providers. This competition makes ABL facilities highly accessible to businesses throughout the UK.

•  Flexibility: The revolving nature of ABL allows businesses to borrow as needed, aligning with operational cycles, seasonal demands, or growth opportunities.

•  Growth Support: ABL can fund acquisitions, expansions, or working capital needs, enabling businesses to scale without diluting equity.

•  Speed: Funds can be accessed quickly, often within weeks, as the focus is on asset appraisal rather than extensive financial due diligence.

Challenges and Considerations

While ABL is powerful, it’s not without drawbacks. Lenders closely monitor assets, requiring businesses to maintain detailed records, which can be administratively intensive. The advance rate may not cover the full asset value, and liquidation values are often conservative.

Why Appoint an Advisor?

A corporate finance advisor will help you fully understand your ABL facility and reporting requirements ensuring you are going into any relationship fully informed and with the right tools to make the facility work for you. For example:

• A multi-asset ABL facility needs a sophisticated model to ensure headroom and ultimately liquidity through the forecast period. Ensuring you have a fully integrated model is essential when considering scenarios that may lead to a shortfall in funding and to ensure your plan is fully funded.

• There are numerous ABL funders in the market with each offering their own unique differentiators, understanding these is key to getting you the most appropriate and flexible facility.

• Knowing how funders manage accounts in real life is a key part of ABL. Given the reporting requirements you will be sending your ABL provider collateral details on a regular basis. Ensuring you choose a funder who you can have a positive working relationship with is therefore key.

• Depending on the size of your requirement you may need to think about bringing in additional lenders as your business grows. An ABL lender in the SME/Lower mid-market will typically hold between £30m - £50m before needing to do this.

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Dan Martin is Partner Head of Deal Origination at Shaw & Co.

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