A recent report by RTE revealed that Ireland borrowed €20 billion throughout 2020 to support trading through the pandemic.
However, while there has undoubtedly been growth in business funding as a result of COVID-19, there are also signs that SMEs are evolving away from traditional types of finance.
Research from the latest Close Brothers Business Barometer revealed that 17% of SMEs in Ireland usually use invoice finance to fund their business, whilst 22% use a bank overdraft. The Central Bank of Ireland reported a sharp peak in the demand for business overdrafts at the onset of the pandemic, before it steadily declining as many SMEs opted for government-backed lending schemes over traditional types of finance.
Now, as companies diversify their business models due to ongoing challenges, many are also seeking more dynamic and accessible forms of finance, such as asset based lending (ABL), to keep up with shifting demands.
How does asset based financing work?
Asset based lending enables larger businesses to raise higher levels of funding through a mix of invoice finance and funds released against other assets on their balance sheet, including stock, property, plant and machinery. This type of finance can also be augmented with cash flow loans.
Funding through ABL is based on a firm’s assets, and not the external environment, which can make it more flexible than some traditional lending options, enabling funding to grow in line with businesses.
What is asset based lending used for?
Asset based lending can help businesses access the higher levels funding they need. The working capital it provides can be used for anything, from meeting day-to-day operational requirements to providing headroom for seasonal fluctuations or future events.
This type of funding is often used to support strategic business operations, such as acquisitions and mergers, restructures and turnarounds. The structure of ABL offers speed and simplicity and can provide an immediate cash injection, as well as longer term funding once a transaction is complete.
Due to the flexibility it provides, ABL can also be particularly useful during times of economic uncertainty. As a result of the coronavirus pandemic, cash flow can be less predictable and many businesses are undergoing operational changes. In these instances, asset based lending can provide liquidity by releasing funds from assets on balance sheets and unpaid customer invoices. This means funding can be less affected by market volatility.
Who uses ABL?
Asset based lending is typically used by larger businesses with a turnover in excess of €14m / £10m that have existing assets on their balance sheet.
At Close Brothers Commercial Finance, we consider each company’s potential, as well as historical performance and current working capital requirements. Our bespoke, holistic approach means we can tailor facilities around each business’ specific requirements to achieve greater liquidity and support business growth. We take the value of a firm’s assets into consideration to find the best funding solution.
To find out more about asset based lending, fill out an enquiry form on our website or call us today on (01) 960 9402 for the Republic of Ireland or 028 9099 9585 for Northern Ireland.