The role of asset based lending in export
By Richard Haighton, trade and working capital director, Barclays
ASSET based lending, or “ABL”, is an often overlooked but increasingly important tool for UK businesses looking to expand their exporting activity.
ABL is a generic term, but typically involves a company securing funding from one or more of its receivables, inventory or plant & machinery (P&M) assets.
For a UK business looking to fund its trade cycle with export customers, there are two key – but potentially very diverse – attractions of this approach.
Firstly, a company could look to leverage the asset generated by the export trade – likely to be the export receivable – thus matching funding, credit and exchange risk to the underlying transaction.
For example an invoice for a sale of product to Europe, China, USA or other territory could be discounted here in the UK to provide early financing against the future receivable. This may also enable the seller to offer credit terms to a buyer, or extend terms beyond the period with which the UK exporter may otherwise be comfortable, which itself may help to drive sales.
If coupled with a credit insurance policy or bad debt protection product from the discounter, this could be very powerful solution to any company looking to fund the working capital cycle created by its export activity.
Traditionally, receivables finance was based around invoice discounting or factoring, but increasingly Barclays are seeing large and sophisticated corporates take a more bespoke approach to their financing requirements, looking at funding individual debtors or even individual receivables for example. In some circumstances it is even possible to fund these receivables on a non-recourse basis, and with appropriate auditor sign off take them off balance sheet too.
An alternative to using the receivable created by the export sale to raise finance is to use UK based assets (UK receivables, inventory and P&M) to secure finance. There are some good reasons why this may be beneficial to the exporter: they may be unable to secure finance against the export receivable for corporate and/or country risk reasons, there may be an attractive price advantage to using UK assets or perhaps FX management would drive this approach.
Again, there are now a myriad of ways to fund even the receivables element of these assets, and a bespoke solution can usually be found.
Often, your financing partner can provide invaluable feedback on the merits and problems associated with any planned export activity. If your bank or credit insurer is unwilling to take a risk against a particular debtor or even country for example, why should you? Alternatively they can advise on the best way to structure a transaction, providing some do’s and don’ts on the terms of trade which could mitigate risk, improve cashflow or even increase the profitability of the transaction.
ABL is effectively an evolution of the mature factoring and invoice discounting markets that now provides numerous funding options for SMEs, large and even global corporates alike. Equally, we are offering marrying these facilities with more traditional export solutions (bonds and letters of credit for example) to ensure a “whole of trade cycle” solution. Our advice is to make sure that ABL and receivables finance is at least on your list of potential export funding solutions.
