With manufacturers currently facing recurring challenges such as supply chain concerns, increasing energy costs, staffing, and generally the more uncertain geopolitical backdrop, maintaining higher stock levels has become a necessary business decision – with some businesses having learned the harsh lesson of halted production lines during the pandemic.
Many of our clients tell us that as a consequence, an increased stock level is adding pressure on an already strained working capital cycle, caused by often lengthy delays between production and final payment, particularly where they feel compelled to offer attractive credit terms to their customers.
I would argue that partly as a result of these pressures, we’ve seen a significant uptick in demand for structured working capital solutions, with asset-based lending (ABL) becomingan attractive alternative to the traditional loan facilities sitting alongside an overdraft, among our manufacturing clients over the last year.
So, let’s look at why there is an increased interest in ABL and the potential benefits for manufacturers.
Flexibility and beyond
More common in the US market and still comparatively rare among mainstream lenders in Northern Ireland and the UK until relatively recently, in my experience, ABL essentially allows manufacturers to benefit from the value of their business assets to achieve greater liquidity.
Borrowing against assets such as receivables, inventory or machinery can be a very effective way to raise funds to meet seasonal or unpredictable working capital needs, make the most of new opportunities or restructure existing financing.
Although it is often a preferred financing route for private equity or financial sponsor led business, ABL can be efficient and flexible in meeting the needs of capital-intensive manufacturers in particular, while also being relatively admin and covenant-light, compared to an overdraft, revolving credit facility (RCF), or term loan, which are often among the default go-to options for many manufacturing CFOs that we have worked with over the years.
Through an agreed loan to asset valuation formula, ABL gives businesses easy, real-time access to a facility that they can dip in and out of to fund their working capital requirements according to their changing trade cycle needs.
In effect, the facility grows with the assets the business is creating, so it’s well suited to growing businesses and those looking to make acquisitions, where it can be used as a complementary boost to liquidity.
ABL also tends to come with fewer financial covenants compared to, say, an RCF, which is typically offered by lenders with more stringent conditions attached around financial performance, and in particular historic earnings, whereas ABL is focused primarily on the value of the business assets.
This in turn typically makes for less onerous admin, compared to the ongoing reporting requirements on business performance under an RCF.
As ABL gives the lender a tighter grip on security through the value of a client’s business assets, the cost of capital is usually lower for the lender, which means it may be able to offer better terms than traditional overdraft facilities.
Finally, while ABL is primarily a working capital solution, it can also be used for other purposes where businesses already have good liquidity, such as dividend recapitalisations or cash-outs.
While ABL won’t suit all businesses and does require a fair amount of upfront due diligence, this is generally outweighed by the flexibility and other benefits of the borrowing facility once it’s been set up.
Bringing the benefits to our clients
At Barclays we are committed to meeting the working capital needs of our manufacturing clients, and by building our team’s expertise in this area over the last couple of years, ABL adds another product solution to aide our customers. Neil Sturgeon, Large Corporate ABL – Northern Ireland says, “ABL has seen a significant resurgence in the market over the last 18 months and Barclays is well-equipped to support businesses with their asset-based financing needs. We saw increasing demand in the ABL space last year and have concluded ABL deals with some major manufacturers in that time, with several more in the pipeline”.
One example is a £200 million borrowing base facility for a multi-billion-pound global business engaged in all stages of the recycling supply chain and employing more than 3,000 people. This facility is particularly well suited to the company as it helps the business manage any delays in shipping its processed metal to customers around the world, as well as coping with the working capital impact of metal price volatility.
We have also agreed a significant ABL facility with one of the UK’s leading manufacturers of holiday homes, secured on its inventory and receivables assets, as a working capital solution ideally suited to a business with a protracted trade cycle and heavily impacted by seasonal factors.
Another example showcasing our appetite to support large, more complex corporate structures with an Asset Based Lending facility is to one of Europe’s leading producers of domestic greener and cleaner smokeless solid fuels. We were able to structure a competitive, flexible financing package with a borrowing base facility linked to the value of their broad range of assets, aligned to the seasonal nature of their business, to support their growth.
With no sign of working capital challenges disappearing, I think it’s likely that more manufacturers will follow suit in the future.
To find out more about how we could support your business, visit Barclays Corporate Banking
Gavin Campbell, Business Development Director, Barclays Corporate Banking, Northern Ireland
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