Hermes Capital provides Asset Based Loans to businesses in transition.
Transitioning scenarios include growth, acquisition, restructure, business turnaround and – as demonstrated in this month’s case study below – industry turnaround!
“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 secured by equipment and/ or property.
This month’s case study demonstrates how Hermes fills the lending space in the mining services sector that remains vacated by the banks in spite of positive sector trends in recent months.
A business specialising in earthworks in the mining and infrastructure sectors suffered when a developer the client had worked for failed. As a result the client booked a substantial loss.
The loss was inevitably funded by the ATO, so the “banking connection” was transferred to loans management.
In the clients region, mining has recovered along with stronger thermal coal prices. The client had won two substantial contracts but had started the projects under capitalised.
Given the clients recent financial performance the bank declined to provide additional working capital requested, and the client was in danger of leaving its new customers high and dry.
Asset Based Lending Solution
The client was referred to Hermes by (ironically) the bank’s investigating accountants who were aware of Hermes’ capabilities.
Hermes grasped the clients position – namely that whilst its performance in recent history had been marred by a bad debt, fundamentally the business was sound, and its prospects were excellent given the recovery in the sector it operated in (thermal coal).
Hermes provided a debtor finance solution, making $3,000,000 available to the client and allowing them to undertake their newly won projects.
The gap in the market for commerical finance
Hermes was able to provide assistance that the bank could not partly because of the “asset based lending” nature of debtor finance.
The serviceability of bank debt is determined by an analysis of profit – normally historical profit. In this clients’ case however, they needed the bank to ignore history and rely on forecasts – numbers that may or may not transpire in the future.
The “serviceability” of debtor finance by contrast is determined by invoices based on sales that have occurred. In this case the client had started the projects and had invoices ready to fund – they just needed a willing funder!
The business has been able to fulfill the new contracts, increasing revenue and restoring profitability as a result.
Ironically the bank has also been a beneficiary, given the client is now better able to meet its commitments, including addressing the ATO arrears, and is on the way to healthier ratios at review time.