Sweating the assets to leverage capital

Manufacturers in the automotive and other industries are increasingly making use of asset-based lending (ABL) to provide working capital and finance expansion.

According to the UK-based Asset Based Finance Association (ABFA), around 42,000 companies in the country use services such as factoring, invoice discounting and ABL to grow their businesses. “However, in more recent years it is the advent of Asset Based Lending which has got everyone talking,” says the association’s website. ABFA says that ABL, which is well established in the USA, is becoming increasingly so in the UK. “Asset Based Lending is when an organisation lends money to a business against their property, plant, machinery, stock, or sometimes even their brand name. It delivers sophisticated solutions for a variety of scenarios including growth, management buy-outs and management buy-ins, mergers and acquisitions, refinancing, turnarounds, and public to private transactions (across both a European and a global arena). It is also not uncommon for several Asset Based Lenders to work together in what is known as a ‘syndication’ or club deal to combine the lending power required,” it says. Automotive Industries (AI) spoke to John Gribbon, Regional Managing Director, Commercial Finance at the UK-based Secure Trust Bank to find out more about ABL.

AI: In the automotive industry we have the need for both long-term finance and finance to cover shortterm emergencies. What alternative finance solutions are available? Gribbon: There is quite a lot of credit out there even in these difficult times. So, there is opportunity for business to get funding and working capital. But, for asset-rich businesses in the manufacturing sector you would struggle to get better funding than asset-based lending (ABL). This is particularly true if the lender takes time to get to know your business and understand your cash-flow and strategy – and has the experience to be able to identify the underlying value. In the automotive industry, there are many businesses which have a lot of working capital tied up in their assets, and that is where ABL is perfect. Alongside receivables, we can also leverage against inventories which fall into three categories: raw materials, work in progress (WIP) and finished goods – ordinarily, finished goods represent the best security for an ABL lender. Typically, we start with finished goods. Whilst it is usually easier to fund against, there will have to be a decent value. Raw materials usually have some value as well, but this is often only marginal, and work in progress also has little relative value because it is unfinished. Quite a lot of working capital can also be provided using the security of plant and machinery. It is not unusual in this sector for machinery to have values higher than that in the balance sheet. Depreciation may have written the balance down but often its undervalued. In the automotive industry, some of the machinery that manufacturers have is of fairly high value and has residual value. We can therefore refinance this if it is encumbered or raise finance against unencumbered machinery. Machinery will be appraised as either in-situ value or ex-situ value and we would typically look at the latter. So, by considering the assets carefully we can give far more than a traditional lender might.

The automotive sector works very well for us, even though it has had a tough time as of late. Some of the problems are Brexit-related, some are steel-related, and others due to the global slowdown, with China not buying as many vehicles as it did. Quite a lot of the businesses in the sector have been around for quite a long time, and we understand the industry is cyclical. So, when time gets tough and orders slow down, we know there will be a demand for working capital, and we try to support them by leveraging those assets.

AI: What are the benefits to the owners and shareholders? Gribbon: The business owner benefits as they have the additional working capital needed to continue doing business. ABL can also help obtain discounts from suppliers by accelerating payments. In terms of the shareholders, we would ordinarily not be asking for personal guarantees unless we saw that the business was under-capitalized or there was insufficient skin in the game. Ordinarily, you would expect that as a business grows and the asset-base grows then an ABL line will grow with it. It’s also a useful solution for when there are working capital spikes and an ordinary overdraft may not be sufficient. From an administrative perspective, the funding we provide is not difficult to manage from accounting or tax perspectives. The well managed finance department should be able to take the extra admin that comes with it in their stride. Employees benefit because the extra working capital we provide can often create the headroom that allows a business to trade on and preserve jobs.

AI: Do you see STB increasing its presence in the manufacturing industry? Gribbon: Absolutely, for the right businesses. We love going to see and helping businesses that actually manufacture something. It is on the factory floor that you can see the assets working and the enthusiasm and passion that the directors and owners have in their business. That is when they are most at home – when they are actually on the factory floor. It is an ideal and exciting sector for us to operate in.

AI: On the other side, how can manufacturers use finance protect themselves against global competition while catering for growing demand. Gribbon: It would depend on whether they are operating nationally or internationally. STB would certainly be able to help them with future growth. It is geared to best suit businesses which are growing. As your revenue and assets grow, so should your underlying value. Any manufacturing business that is growing should consider ABL because they will have assets that can be made to work and its’ value creating.

AI: Do you work internationally? Gribbon: We are a UK-based bank focused on the UK economy. We differentiated ourselves from other local and foreign lenders by being able to move quickly. Because we are UK-based we can offer a quick turnaround, and that is appealing for many of our clients. Naturally we will fund foreign debtors but not foreignbased clients.

AI: What is next for STB? Gribbon: We are going through quite a rapid period of expansion. We have recruited more experienced people onto the team, which has allowed us to write larger and more complex transactions. The deliberate strategy has been to move away from lots of volume and smaller deals to larger and more complex transactions such as ABL. So, while our total number of clients has not increased, our lending book has expanded and our profitability has grown. We managed last year to double our balance sheet and triple our profit, and we hope to continue safely on that trajectory. The quality of our team is of the utmost importance it is easy to lend money – it’s not always so easy to get it back!

AI: What will the impact of Brexit be? Gribbon: I feel for manufacturers because there has been so much uncertainty. But I see some manufacturing moving back to the UK. Some of our clients see opportunities in the sector, particularly for short batch and quick turnaround orders. We have the capability in this country to do that kind of manufacturing, so I see more of that short batch, good margins and highly skilled manufacturing coming back to the UK.