Lenders open door to a new style of fi­nanc­ing

Loans based on as­sets, not prop­erty, can en­able busi­nesses to ex­pand, dis­cov­ers An­thony Har­ring­ton

The Herald Business - - Commercial Report -

IT WAS in­evitable that in the wake of the great 2008 global fi­nan­cial smash, reg­u­la­tors were go­ing to de­mand that banks in­crease the amount of cap­i­tal they hold in re­serve. Since the risk is deemed to in­crease for cer­tain kinds of lend­ing, such as term loans and over­drafts, the banks have to hold even more cap­i­tal in re­serve for th­ese kinds of loans.

This has cre­ated an in­cen­tive for banks to look for other lend­ing prod­ucts that carry less of a cap­i­tal re­serves penalty. For busi­ness, par­tic­u­larly for firms in the small to medium-sized en­ter­prise cat­e­gory, the way this has played out has been to make tra­di­tional lend­ing harder to come by.

How­ever, this need not mean that lend­ing is un­avail­able. It means, rather, that alternative sources of fund­ing have come to the fore, namely lend­ing that em­pha­sises the role of any as­sets that the com­pany can put up as col­lat­eral.

And, as Simon Wells, busi­ness devel­op­ment di­rec­tor, north, for GE Cap­i­tal – one of the largest of the as­set-based lend­ing (ABL) houses – ex­plains, there is now quite a broad range of as­sets that lenders will con­sider when putting to­gether an ABL pro­posal for a busi­ness client.

Th­ese as­sets, such as the sales day book or in­voices, also in­clude items such as in­ven­tory, plant and ma­chin­ery. Be­fore this would ei­ther not have been con­sid­ered by main- stream lenders, or else would have been marked down un­re­al­is­ti­cally as col­lat­eral, re­leas­ing only a frac­tion of their value to the busi­ness.

For some banks, prop­erty is also back on the ta­ble for con­sid­er­a­tion, though the banks still have so much sec­ond and third-tier prop­erty on their books, mostly at val­ues that are in­flated by com­par­i­son with cur­rent mar­ket prices, that prop­erty is not the most com­fort­able of as­sets for them to con­sider.

“We are find­ing that busi­nesses are very open to the idea of ABL rather than term loans and over­drafts as a means of rais­ing work­ing cap­i­tal,” Wells says. I n par­tic­u­lar, ABL lenders such as GE Cap­i­tal are prov­ing at­trac­tive to SMEs, since com­pa­nies have found, to their cost, that keep­ing all their eggs in one bas­ket, by con­fin­ing their re­la­tion­ship to just one ma­jor bank, has not played well for them – par­tic­u­larly now that banks are re­con­sid­er­ing their lend­ing strate­gies.

Wells points out that ABL pro­vides bor­row­ers with a prac­ti­cal mix of fund­ing. “A com­pany can raise fund­ing against its in­ven­tory and sales ledger (in­voice dis­count­ing) on a re­volv­ing ba­sis which mir­rors its work­ing cap­i­tal re­quire­ments but can also bor­row against un­en­cum­bered plant and ma­chin­ery by way of a term loan which can smooth out peaks and troughs in trad­ing per­for­mance. This has proved at­trac­tive for SME busi­nesses over the last few years,” he com­ments.

With Scot­land be­ing dom­i­nated by the three ma­jor banks – Royal Bank of Scot­land, Hal­i­fax Bank of Scot­land and Cly­des­dale Bank – in­voice dis­count­ing as a form of lend­ing has been no­tice­ably slower to take off here than in Eng­land. But, SMEs are now find­ing that ABL is a prod­uct that is ide­ally suited to their fund­ing needs and is com­pet­i­tive against the tra­di­tional over­draft, Wells notes. There is a tremen­dous ap­peal in re­leas­ing cap­i­tal that is tied up in ex­ist­ing plant and ma­chin­ery.

This el­e­ment of ABL has much in com­mon with a con­ven­tional term loan in that it will be paid down over an ag reed pe­riod and the lender will look closely at the bor­rower’s cash flow to en­sure they are com­fort­able ser­vic­ing the debt.

But from the lender’s per­spec­tive it is at­trac­tive, since it is backed by solid col­lat­eral which has been pro­fes­sion­ally val­ued. “We would ex­pect to ad­vance up to 80% of the value of the equip­ment, so plant and ma­chin­ery worth £1 mil­lion would raise £800,000 of fund­ing,” Wells says.

KPMG part­ner Bruce Walker points out that there have been some fairly large ABL fund-rais­ing


ex­er­cises al­ready in 2013. In March the Glas­gow-based GAP Group, the largest pri­vately owned plant and tool hire busi­ness in the UK, shifted its bank­ing from Cly­des­dale to the Royal Bank of Scot­land Cor­po­rate be­cause RBS was pre­pared to pro­vide GAP with a three-year ABL deal worth £70 mil­lion, which was ba­si­cally lend­ing against GAP’s ex­ist­ing plant and equip­ment.

GAP man­age­ment reckon that the work­ing cap­i­tal re­leased by this deal will en­able them to con­tinue to open up at least three to four new sites a year.

“GAP had tra­di­tion­ally bor­rowed on term debt and over­draft, but us­ing your bal­ance sheet to fi­nance plant is not a good way for­ward. When you still own the as­sets, amor­tis­ing them is not a good way for­ward. What you need is a re­volv­ing credit fa­cil­ity.

“This al­lows you to grow much more rapidly and to buy new equip­ment and bor­row against that equip­ment in turn,” Walker says.

He points out that the banks are now mak­ing a ma­jor move to try to trans­form as much of their term debt and over­draft busi­ness into ABL lend­ing as pos­si­ble. Smaller com­pa­nies need to take ad­vice as to how they can take ad­van­tage of this switch to ABL by fun­ders.

In­stead of a shut door they could well find that lenders are back in busi­ness, Walker says. As a re­sult, we are likely to see a num­ber of an­nounce­ments of good-sized ABL deals through 2013 and be­yond.

Simon Wells says that GE Cap­i­tal will of­fer loans worth 80% of a com­pany’s plant value

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