Hermes Capital provides Asset Based Loans to businesses in transition.
“Asset Based Lending” is commercial financing to a business with up to two components: a revolving working capital facility supported by accounts receivable, and; a term loan facility that potentially doubles the availability of funds, and is secured by plant and equipment, and or real property (usually via a first or second mortgage).
This approach to lending is well established in the US and is becoming more popular in the UK, as seen here.
This month’s case study demonstrates how in Australia Hermes fills the gap left by the banks and other institutions in the SME market for commercial finance.
A business manufacturing components and primarily servicing the mining sector found itself, like so many other businesses in that sector, needing to make dramatic changes if it was going to survive.
Much of its tooling was generic and its regional location gave it a competitive advantage in terms of labour costs.
However the mining downturn had resulted in cash flow problems and an inevitable accumulation of tax arrears. In spite of an arrangement with the ATO, the business could not raise the capital it needed to refocus its business on new found markets outside of mining services.
Asset Based Lending Solution
An overall funding requirement of $500,000 included a need for $250,000 in fresh capital to pay-out the ATO as well as $250,000 to payout the incumbent debtor financier (who did not have the ABL capabilities possessed by Hermes and requisite to generate the additional capital required).
Given the business was already funding its receivables, the only other asset available for security was its manufacturing plant.
Hermes valued the manufacturing plant and was able to generate sufficient capital addressing the funding requirements of the business.
The gap in the market for commerical finance
No other lender in the market place (and certainly no bank) would lend to the business given its tax arrears and historic dependence on the mining sector.
Other debtor financiers do not have full ABL capabilities, and they (including the incumbent at the time) simply could not provide the solution required.
Hermes was able to assess forecasts and mitigate lending risk by utilising a range of assets – not just debtors – in order to provide a workable solution.
The business is now adequately funded and able to leverage its competitive location and cheap labour costs to manufacture componentatry delivered Australia wide across a number of industry sectors.
It is well placed to restore its pre-mining downturn profitability and by extension the wealth of its proprietors.