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The tools to flex

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News - 21 December 2020

In our first article on the mid market Chris Pacey and Jeremy Harrison, ABN AMRO Commercial Finance UK, explored how the ability to respond swiftly to changing circumstances has never been more important for mid-market businesses with a turnover between £2m and £20m. The second round of lockdown restrictions in the UK, has reminded every business that Covid-19 is far from over. For many businesses, it was a crushing blow to have to close again. For others there have been clear opportunities, not only to survive the pandemic, but to thrive.

Companies with the right markets and set up must still be agile to seize the initiative –pivoting their business models or taking the plunge and going for growth in new markets.

There are lots of ways in which Asset-Based Lending (ABL) can support mid-market businesses at those critical junctures, providing them with the flexible finance they need to stay fleet-footed. In this article Jeremy and Chris take a look at four use cases for ABL.

 

Going for growth

For some businesses, the opportunity to grow is directly linked to the pandemic. A great example is the surge in demand for cleaning materials, wipes and even toilet paper (although we’ve not seen panic buying since the first lockdown).

Our clients supplying the medical sector, for instance, have experienced huge and sustained increases in orders. In one instance, a business that had historically provided personnel to the NHS, even upended its business model to provide PPE.

Having the right funding in place to support these expansion efforts is vital. Spotting a gap in the market or a rise is demand requires talent – but you need capital to exploit it. Where a business’s existing facilities have been restricted for any reason – traditional lenders are often risk-averse at times like that – ABL has proven ideal to finance that growth.

ABL offers immediate access to cash flow to support a rapid increase in production or delivery of services. Rather than the company having to wait for debtors to pay to inject that cash back into operations, an invoice discounting or inventory lending arrangement gets it straight back into the business, raising capacity.

This was exactly the situation facing one of our clients last year, Inerto, a Blackpool-based provider of logistics and waste placement for over 60 waste transfer stations, local authorities and demolition contractors throughout the UK. Demand in that sector soared through the spring.

The company was on an accelerated growth path, even branching into providing finance solutions tailored to the sector. But in a capital-intensive industry such as waste handling, generating extra working capital is a game changer. Luckily for the Inerto team, they had already started talking to us before the pandemic hit.

By December 2019, the business was getting concerned that its existing finance partner lacked the industry knowledge and experience to take it to the next level. The management team was introduced to us by another client in the same space – we love client introductions!

Our knowledge of the regulatory and commercial drivers in this sector, as well as our own strong focus on sustainability, meant we could put together a financial package to precisely meet the company’s needs. We provided as much working capital as possible to create room for growth – which also meant Inerto could secure more favourable fees offered by recycling plants for early settlement of invoices.

Waste handling has seen strong demand throughout the pandemic, leading to a 30% increase in profits in Q2. We were also able to provide the business with a Coronavirus Business Interruption Loan Scheme (CBILS) loan to offer additional security and peace of mind. That has given the management team confidence to continue with its growth plans.

 

Buying better

A less well understood use case for ABL involves the optimisation of supply chains. Supply chain interruption has been in the spotlight as a result of international lockdowns. Demand surges and demand drops; reduced productivity; storage and access restrictions and raw material shortages, have all been features of the pandemic, with particularly acute effects on smaller companies, this is not helped by the Brexit transition period ending, further disruptions are possible as new systems bed in.

ABL can support businesses to withstand these short-term disruptions and as they build more robust supply networks. But it’s not just about being able to secure new suppliers. ABL can be used proactively, enabling our clients to ‘buy better’ from existing sources.

Companies can usually negotiate better terms from suppliers by paying up front rather than operating on 30 or 60-day terms. Because ABL means being able to generate cash from your own customers immediately, there’s less need for credit terms from your own suppliers. The discounts on offer can substantially outweigh the cost of financing, leading to a significant uptick in profitability.

 

The acquisition trail

For companies with an appetite for acquisitions and the agility to execute them, the next 24 months is likely to provide fertile hunting ground. There will be owner-managers who just don’t have the appetite to weather the crisis, and businesses with robust business models but temporarily impaired trading may become available at attractive valuations, particularly when government support measures are eased.

Whatever the circumstances, acquisition can be a highly effective way to achieve a step change in size, customer or product profile, or geographic footprint. But, of course, it requires funds. ABL is able to lend against the assets of the target company to finance the purchase, perhaps alongside an additional term loan.

Recruitment Investments is a prime example. The organisation was created in 2018, with the ambition of building up a £20m turnover company. The management team used its expertise to identify, acquire and integrate new subsidiaries with centralised cost efficiencies.

We were able to provide an invoice discounting package that evolved with every acquisition, giving the business flexibility to fund further expansion. Covid-19 has done nothing to dent Recruitment Investment’s strategy. In fact, the group has taken the opportunity to further consolidate its market, with three acquisitions completed since March.

Plans are now in place to grow a conglomerate with a turnover of £40m, supported by a renewed £4m invoice discounting agreement in July. We are excited to support the business on its acquisition trail, however far it is looking to climb.

 

Bouncing back

Amongst the key advantages of ABL is its speed and flexibility. Never is that more important than when an abrupt change in circumstances occurs.

Inevitably, the headlines in 2020 have been dominated by the operational and financial challenges presented when unforeseen lockdown restrictions have been imposed. But just as pertinently, we may see a sudden bounce back, particularly if the vaccines that have now proved their efficacy are rolled out to the general population within weeks.

Companies that have stripped their workforce and asset base right back to the bone could struggle to take advantage of a rapid rebound. With ABL, however, they could be ideally placed to ensure any upsurge in orders is accompanied by an increase in available working capital, making it faster to recruit, purchase further raw materials or extend credit terms.

Whichever of these pinch points a company finds themselves facing, we have the ability to tailor our products to meet their needs. We can act quickly to respond to an ever-changing environment, and we are ready to support your ambitions all the way.

 

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