"ABL can be a more accessible form of finance for a business which is currently loss making, working hard to get back on its feet with a well thought through turnaround plan, and is supported by a solid asset base"
The second lockdown has, for many, only exacerbated the problem. Indeed - recent research we undertook revealed that almost a third (31%) of businesses are relying on the Christmas period to help them survive.
However, the ways consumers will or won’t spend this Christmas are hard to predict and strongly tied to the lockdown policies from the Government. We may be facing a lean Christmas; with the impacts of Covid-19 weighing down on consumer and business finances. In addition, the Government is making plans to scale back the support measures put in place earlier this year. SMEs who took HMRC deferrals, Time to Pay (TTP) arrangements, creditor stretch and arrangements with landlords will need to plan for repaying them.
While how Christmas will pan out, and when Coronavirus support schemes will be rolled back are ‘known unknowns’, this does not mean SMEs cannot begin planning and making provisions for 2021. In fact, it is in the face of this uncertainty that advanced planning and preparation for finances is even more important and - for many businesses - asset based lending (ABL) could have a key role to play.
The role of ABL
Asset based lending is a great way for businesses to raise capital to support day-to-day cash flow, unlocking additional value from the assets they already have. And, given the ‘right under your nose’ nature of it, many businesses do not realise the potential value of their assets.
One particular strength of ABL is that the types of assets used as collateral tend to retain their value in a way which withstand fluctuations and uncertainty, like those resulting from the pandemic. By its nature as a more stable borrowing base which is covenant-light, ABL can provide a greater degree of certainty to both the borrower and lender. And this is where I see the role of ABL as a standout product for the right SME - it brings certainty in times of great uncertainty.
And from a practical perspective, ABL can be a more accessible form of finance for a business which is currently loss making, working hard to get back on its feet with a well thought through turnaround plan, and is supported by a solid asset base - a situation which may resonate with many SMEs following the disruption of this year. For these SMEs, ABL could be a strong financing option.
Looking ahead to 2021
For businesses looking to not only survive but thrive, thoughtful planning for 2021 is essential. Many businesses may be able to factor in and tap into ABL finance for those much needed cash injections to boost their financials into the new year. Forward planning is also about more than business forecasting: SMEs need to think now about what their borrowing needs for the next year, or even several years, will be. To get ahead, they can plan for how they will access these loans, and incorporate this into the business strategy - ensuring that they can execute it smoothly and fulfill their ambitions. Challenges will also come from businesses struggling to forecast with any degree of certainty for next year, which could make setting workable covenants difficult. But there are still options for businesses seeking new financing, given ABL has been effectively used in situations like this for many years.
More than just how SMEs will access finance to meet their borrowing needs, now is also the time for businesses and their advisers to plan who they will partner with when it comes to their finances. As a result of the economic impacts of coronavirus, we’ve seen high street lenders lessen their appetite for new business, as well as for providing significantly increased facilities for existing clients. We do not see this situation changing for the remainder of the year and into next.
So where does this leave us for 2021? Ultimately SMEs still need the right finance to make their businesses successful both day-to-day and over the long-term. We’ve been increasingly seeing the alternative lending market step in to bridge the gap - and today is no different. With appetite and a client-centric approach, along with the flexibility that cutting edge technology can provide, the alternative lending space is primed to support the UK SME landscape - educating and offering forms of lending which could boost businesses and help position them for future success.
