Hermes Capital provides Asset Based Loans to businesses in transition. Our funding is typically in the range of $500,000 to $10,000,000
Transition scenarios include business turnaround, start-up, rapid growth, restructures 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:
i) a revolving working capital facility supported by accounts receivable
ii) 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.
Progress Claim Challenge
Industries that bill via “progress claim” – including construction, mining, and civil engineering face special challenges when seeking capital for expansion.
A successful civil engineering business had the opportunity to acquire another established civil earthworks business and needed funding to do so.
Progress claims are a feature of the civil engineering industry and so this enterprise would face challenges.
The business being acquired was not a direct competitor but the market place of the two businesses was sufficiently overlapping to make the acquisition a worthwhile and very synergistic addition to the business.
The client approached their banker who indicated the funding required should not be a problem given that (a) a lot of the value in the target business was in plant and equipment and (b) the clients business itself had a lot of unencumbered plant and equipment on its own balance sheet that would make for suitable collateral.
The funding requirement included both capital to complete the acquisition ($3M) as well as working capital to fund the business integration and sales ramp up forecasted as a result (a further $2M).
Debtor finance was ruled out of the mix as it was thought debtor’s ledgers containing progress claims could not be funded.
On the basis of the bankers enthusiasm for the deal (albeit with credit approval pending) , the client signed the purchase contract and paid a $200,000 non-refundable deposit.
The Gap in the Market for Commercial Finance
There is often a gap between what the “bankers” good intentions are, what they want to deliver to their client and what the “bank” will in fact approve to make deliverable. “Bankers” are often optimistic – again with good intentions – whilst their credit departments are driven by broader economic considerations and other externalities.
Hermes also fills a gap in the working capital finance space by providing funding solutions for businesses billing via progress claim.
Asset-Based Lending Solution
Two months transpired and no approval was forthcoming from the bank. This was a problem because the business sale agreement had a completion date looming.
Until this point in time the bank had been the preferred funding option based on pricing and relationship. The imperative had now switched instead to finding a solution that was timely and effective – to finding a funder with the appetite, balance sheet and decision-making structure to deliver the right outcome.
Hermes proposed its “Capital Maximiser” structure for the funding requirement. A term loan was structured against the auction value of the P and E with an amortisation schedule appropriate for the forecast for the combined cashflow of the two business entities.
A Progress Claim Finance Facility was structured to provide working capital availability against the value of the combined debtors ledgers.
Hermes is the only non-institutional investment fund in Australia that has the capability to structure solutions along these lines and at this level of funding. Further, Hermes is uniquely skilled to manage the tricky process of funding progress claims, having specialisation in progress claim funding from its inception 11 years ago.
The client had the means to complete the acquisition, and avoid forfeiture of the $200,000 deposit – not to mention the opportunity cost of the valuable management time invested in the process and the upside to the business of completing the sale itself.