Are manufacturers recognising the benefits of asset-based lending?

With many of our manufacturing clients facing ongoing disruption to supply chains due to the conflicts in Ukraine and the Middle East, and the generally more uncertain geopolitical backdrop, maintaining higher stock levels is often now the norm – with some businesses having learned the harsh lesson of halted production lines during the pandemic.

Many of our clients tell us that this is adding to the pressures on working capital 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 asset-based lending (ABL) as an alternative working capital solution to traditional loan facilities among our manufacturing clients over the last six months or so.

So what could be causing the increased interest in ABL and what are the potential benefits for manufacturers?

Flexibility and beyond

More common in the US market and comparatively rare among mainstream lenders in 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), term loan or invoice discounting, 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, 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.

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Bringing the benefits to our clients

We are committed to meeting the working capital needs of our manufacturing clients, where suitable, through our ABL offering and have been building our team’s expertise in this area over the last couple of years. On this, Divyesh Modi, Head of TWC Sales at Barclays Corporate Banking 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 already concluded ABL deals with some major manufacturers in the year to date, with several more in the pipeline.

One example is a ￡200 million borrowing facility for European Metal Recycling (EMR), 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 EMR 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 Willerby, 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.

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

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