Jon Hughes

Common misconceptions about ABL




Brokers have many misconceptions about asset-based lending (ABL).

Myth: ABL is just invoice finance, but under another name.

Truth: ABL covers a fuller range of asset classes than invoice finance. A proper ABL facility covers the whole balance sheet of a business and optimises liquidity against a full range of asset classes. As a result, ABL creates increased flexibility and can be deployed in a wide range of situations. It can be used for mergers and acquisitions (M&A), funding growth, refinancing inflexible bank facilities and supporting restructuring.

Myth: It’s more expensive in comparison to other options.

Truth: Rates and charges are very commercial, particularly in view of the amount generated against the asset class. The cost of the facility will depend on the components used. The facility is priced against each asset class, with the receivables element consistent with standard invoice discounting pricing. For example, if financing a management buyout (MBO), often businesses look to use either equity finance or mezzanine finance. However, both are likely to be more expensive than an ABL facility and may involve more restrictive covenants or giving up some control of the business. Using the value of the collateral enables an asset-based lender to keep costs down. Therefore, compared to other facilities, ABL is often a very cost-effective option.

Myth: It’s a complicated facility to run.

Truth: An ABL facility uses information that most businesses produce for their own management. Therefore, ABL should not increase the administrative burden significantly. In many cases, the ABL requirements will give the business improved visibility on the way its assets are performing, particularly with regards to inventory and receivables.

Myth: Getting a facility in place takes a long time.

Truth: If speed is of the essence, a specialist ABL lender can move quickly. In most cases, at IGF, once we receive the required information, we will make an initial credit decision within 48 hours. The time it takes to put a facility in place, therefore, depends on the level of information provided by the business. An asset-based lender will be able to assess very quickly what a business's funding options are. The good news is that when working with an asset-based lender, the businesses should get early access to decision makers, meaning there is usually a consistency in process and a clear timeline to ensure the facility is in place to meet their requirements. In contrast with many banks, businesses often spend long periods of time not dealing with the final decision maker. When using ABL, the process should, therefore, be clearer and quicker.

Myth: It’s a short-term fix.

Truth: Asset-based finance is a medium- to long-term solution that is suitable for a range of commercial situations. Relationships and expertise are at the heart of a facility. An ABL facility combines revolving facilities against trade receivables and inventory with term funding against fixed assets and potential cash flow loan. This means that the business will have the right mix of structural debt and access to funds for working capital. An ABL facility therefore covers not just the immediate working capital requirements, but can also provide appropriate funding lines through a period of development.

Myth: Once I make the introduction, I don’t know what happens afterwards.

Truth: At IGF, we make certain you know how your introduction is progressing at every step along the way.

 

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