Demand for ABL has been steadily increasing over the last decade and it has now cemented its position as a mainstream and highly effective financing tool for businesses of all sizes.
ABL’s ability to quickly release cash makes it a suitable funding solution for both the good times and the bad.
Figures from the Asset Based Finance Association (ABFA) show that the total value of ABL advances in the UK for the four months to the end of September 2008 totalled £17.6 billion, a 15 per cent rise compared with the same period in the previous year.
One of the primary reasons for this recent rise in popularity is ABL’s ability to support companies through turnarounds and restructurings.
Rather than focusing on recent difficulties that a company may have been experiencing, ABL providers consider the strength of the business’ strategy and the management team’s ability to execute it.
Many firms which experience trading or cash flow difficulties may still be asset-rich and ABL can unlock the hidden value within the entire asset base.
Rising insolvencies
According to the latest statistics published by the Insolvency Service on 6 February 2009, in the fourth quarter of 2008 there were 261 receiverships, 2,018 administrations and 149 company voluntary arrangements.
In total these represented an increase of 220.3 per cent on the same period a year ago.
With tough market conditions showing little sign of abating and the potential threat of insolvency increasing, it is likely that ABL will come increasingly to the fore as viable businesses look for a route out of their current difficulties.
Easing the burden
ABL is seen as a secure, yet flexible way of lending. Because ABL facilities are predominantly revolving credit in nature, it does not require a fixed number of payments.
This is particularly beneficial for businesses as it helps to provide liquidity for a company’s day-to-day operations, without the burden of heavy repayment schedules.
Crucially, it can be used to refinance existing facilities that, in the current downturn, have become onerous and a have a potentially negative impact on a business’ cash flow.
Reinvesting to reinvigorate
The ability to reinvest cash back into a business is essential if a turnaround is to be successful but many businesses struggle to generate the levels of working capital required to do this.
As ABL is capable of bridging the gap between taking a customer’s order and receiving payment, it enables companies to vigorously pursue new opportunities without worrying about the impact on its cash flow.
This helps management teams to concentrate on their longer term strategic objectives rather than the day-to-day management of the sales ledger.
Factoring facilities in particular reduce the administrative burden by issuing statements and reminder notices on a company’s behalf.
Protecting the foundations
Cash is crucial to the long term prospects of a turnaround and one bad debt can send a business back to square one.
With rising numbers of insolvencies, companies are also including an element of protection in addition to ABL facilities.
Debtor insurance policies protect a company’s sales ledger against the risk of late payment and customer insolvencies and are increasingly seen as a crucial part of the turnaround mix.