Hermes Capital provides Asset Based Loans to businesses in transition.
Transitioning scenarios include growth, turnaround, restructure or, as demonstrated in this month’s case study below – business acquisition.
“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 month’s case study demonstrates how Hermes fills the gap left by the banks and other institutions in the SME market for commercial finance.
A long established manufacturing business struck cash flow problems when a joint venture it had entered into turned sour.
On paper the JV had been a good idea – the JV partner had complimentary product lines and the same market. In practice however the two management teams were incompatible and the relationship turned sour.
As a result the client was out of pocket considerably, and the bank withdrew its support when losses were reported.
Working capital was needed to fund the transition of the business and to pay out the incumbent bank.
Asset Based Lending Solution
As an asset based lender, Hermes makes two key assessments when deciding whether or not to lend – on asset coverage and on “runway”.
When gauging asset coverage, Hermes not only considers debtors, but also reviews equity in unencumbered equipment and the value of property (if available) on a second mortgage basis. In this case the debtors were suitable, there was equity in manufacturing plant, and there was also equity in the directors home.
“Runway” is the cash that will be surplus post funding after key creditors (such as the bank) have been paid out. In this instance, whilst the recent historical accounts showed losses, the forecasts (post JV break-up) credibly showed a positive cashflow in a short space of time – certainly before the “runway” would be exhausted.
The gap in the market for commerical finance
Hermes was the only lender that could provide sufficient capital to both fund the debtors plus provide the capital required to pay-out the bank. Other funders could be found willing to fund the debtors, but none of these could fund the other assets.
The business successfully transitioned to profitability post JV dissolution.
It has restored the confidence of its suppliers – lost when the JV was in conflict – and it with the right funding in place has recovered its market position with its customers and is once again on a growth footing.