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Using Asset Based Lending to fund acquisitions

23-11-2022|Anthony Gougeon

When looking to acquire a business, having access to the right kind of funding can make all the difference between a long-winded journey and a smoother strategically thought-out road.

Why look into asset-based lending for acquisitions?

One funding option that has been increasingly growing in popularity is asset-based lending, which enables companies to tap into the value of their assets — be it receivables, plant and / or machinery, or property — by borrowing against them. Last year, invoice finance advances rose by 25% to £17.4bn, while new asset finance business was up by 14% to £31.3bn.

Ultimate Finance’s Chief Executive Officer, Josh Levy, explains, “We’ve seen a shift back towards asset-based structures that benefit from personal service and flexibility, as well as the ability to generate more funding availability from assets than could be done from cashflow.”

How can asset-based lending help fund acquisitions?

Through asset-based lending, support can be offered for various types of acquisitions depending on the specific needs of a business, making it a versatile and commonly used funding structure by management teams, trade buyers and private equity. Due to the variety of assets available to a business, securing funding against receivables, machinery and property can often generate significant capital for both upfront consideration as well as ongoing cashflow for deferred consideration. In many circumstances, the buyer may not need to invest much equity directly.

The key reason? A company’s debtor book. Too often overlooked, it can form a very substantial part of the assets of a business and a Working Capital facility such as Invoice Finance will release cash tied up in unpaid invoices. Here are some examples of where asset-based lending can help support different types of acquisitions:

  • Management Buyout (MBO): where a company’s existing management team purchase most or all of the company’s assets and operations, offering them greater potential rewards than as employees of the business. Through asset-based lending, the sale of the business can be facilitated by raising capital against unencumbered assets, with the management team sometimes required very little equity on day one.
  • Management Buy-In (MBI): where managers not already associated with a business purchase ownership of the company and replace the existing management team. This scenario is more common where a business is seen as undervalued or requires new leadership due to succession or poor management. As with an MBO, existing assets can be used to raise capital to directly assist with the sale and to keep the acquired business moving.
  • Bolt-on Acquisition: where a business is added to an existing company, usually because they both operate within the same market or provide services that can easily complement each other. In this scenario, asset-based lending can be used to raise funding against the assets of both the buying company as well as the target company.
  • Corporate Carve Out: where a business is allowed to separate from its parent company to independently move in a new direction. This could involve new or existing management, and perhaps Private Equity involvement, with asset-based lending used to support the funding requirement.

Asset-based lending provides a multitude of funding options to support acquisitions and, with the ability to raise cash against more than one asset, offers potential for generating even higher levels of funding.

Planning for the long term

Once a business is acquired, exciting new milestones will keep popping up on the horizon; expansions, recruitment, and increased demand can increase the cashflow pressures associated with the day-to-day running of a business.

Asset-based lending offers many opportunities for facilities to grow alongside a business by providing more flexibility than a standard loan or overdraft. Working Capital facilities for example can be tailored to the value of a sales ledger: the more sales, the more cash is available to help a business meet its ambitions. However, one of the greatest strengths of asset-based lending relies in its flexibility to provide maximum capital.

Ultimate Finance has identified a structural market gap for truly joined-up, relationship based sub-£10m multi-asset lending, with traditional SME funding sources remaining hard to come by. Our Structured Finance proposition allows business to borrow against multiple assets at the same time through just one facility, and a single point of contact to provide maximum liquidity with minimal friction. The solution has proven ideal to enable additional funding to be generated for growth and expansion, M&A activity, turnaround situations, restructuring events, and shareholder exits.

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