Covid-19 has had a major impact on businesses' use of working capital. The support which the UK government has afforded small businesses, through the Coronavirus Business Interruption Loan Scheme (CBILS), and its variant for medium to larger sized businesses, (CLBILS), has helped to provide an additional source of working capital funding to businesses during the last year.
With applications for the CBILS and CLBILS schemes closing on 31 March 2021 (to be replaced with the Recovery Loan Scheme from April to the end of year), we have seen increased activity in the ABL and receivables financing market among both our borrower and lender client base as businesses review their working capital options so they are fit for purpose.
Many businesses have been able to use government-backed schemes alongside their existing forms of liquidity and have consequently not had the need to draw heavily on their existing working capital sources. Several of our funder clients have seen a decreased average utilised position of certain working capital products and also fewer than anticipated insolvencies given the difficult trading conditions. However, external working capital support will continue to be fundamental to the operation of businesses large and small with the inevitable phased withdrawal of government-backed funding.
Benefits of ABL and receivables financing
ABL and receivables financing is an increasingly attractive proposition to borrowers (and funders) in this economic climate. Such products can offer a degree of flexibility to sit alongside existing working capital solutions (and indeed the government-backed schemes) and can help businesses extract value from balance sheet assets which otherwise may not be harnessed for cash flow purposes.
The difficult trading conditions for several industries has also seen an increased appetite among our funder clients to transition businesses from looser revolving credit facility arrangements to asset based funding solutions so as to move closer to the operation of the business and correlate funding to an asset-backed position. As a result, it is clear that ABL and receivables finance facilities are being considered as a viable alternative by a wider range of businesses than before.
Understanding the product
This has led to many businesses needing to adjust to how these products work, including what can be drawn (and when). Certain borrowers have been keen to challenge the level of control exercised by the funder, particularly where revolving credit facilities may be the previous point of reference.
We have seen a particular focus on the certainty of funding and the extent of lender discretions, along with the degree of funder control in respect of reserves which may be applied and eligibility criteria in respect of assets to be funded.
One way in which borrowers are seeking to erode discretionary rights is by requiring notification detailing the rationale for an adjustment (or even a consultation period) prior to a change which reduces funding availability. Other borrowers are seeking to specify the reserve and funding criteria in greater detail at the outset (subject to minimal alteration thereafter).
Naturally, the views of the funders have been informed by both wider market trends on this point and also specific policy shifts (not least to accommodate the reserves which may be required as a result of the return of crown preference and the impact on inventory finance products).
Flexibility v availability
In our experience, it is possible to strike a balance that gives the borrower comfort as to ongoing availability, while allowing the lender to retain the the control required to operate such ABL and receivables finance products. Striking the right balance is also important to ensure these products remain of interest to the wider market as businesses contemplate how to transition from government-backed support packages.