Why Everybody’s Talking ABL

There was a time when asset based lending was considered a financial last-resort of sorts. The act of raising funds against a business’ property, machinery or stock is after all not too dissimilar to personal loans drawn against an individual’s house, so it’s easy to see why some companies have been reluctant to go down the asset finance route. But now it seems to be growing in popularity.

ABFA, the asset based finance association, has estimated that the sector as a whole will grow by up to 9% in 2013 and that a total of £18bn will be raised via ABL, with those companies taking advantage of this once-maligned route to finance forecast to increase their sales by as much as 10%. So what’s behind this sudden resurgence in the appetite for asset based lending?

David Crumbaugh of US-based law firm Latham & Watkins has pointed to the low interest rates, safety and increased mainstream exposure (via organisations such as ABFA) associated with asset finance as key reasons behind this increased uptake. Cash flow loans, he says, typically carry an interest rate of around 6%, compared to an average 2.5% for a solid asset based loan. In addition to this, the level of funding able to be raised through ABL is significantly higher than typical cash loans, with anything up to £50m able to be raised in one deal.

The “all-time low” that banks are experiencing at the moment in regards to cost of funds is driving mainstream lenders towards the asset finance market. For example, the Dutch banking giant ABN AMRO formed their Commercial Finance division specifically to service this emerging market. The deals have been coming thick and fast too, with Centric Commercial Finance having issued funds to provide NBGI Private Equity with the ability to acquire the Aberdeen and Norway operations of Cosalt Offshore. The deal involved asset-based lending against maritime equipment possessed by the organisation.

And it wouldn’t appear as if the asset finance bubble is going to burst any time soon. Equity sponsors are increasingly becoming involved in deals, allowing borrowing companies to enjoy a greater degree of “flexibility, freedom and cost savings that ABL lending affords.” Lenders are typically able to offer a loan up to 80% of the market value of plant and machinery, 30% on raw materials and 60% on property. This is leading businesses to diversify their borrowing portfolio across these assets, in order to spread the already relatively low level of risk.

Usually, asset-based lending is combined with another method of commercial financing such as invoice discounting.

With traditional lines of credit squeezed, ABL and associated channels are becoming an increasingly popular option for both small and large businesses.

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