Asset Based Lending for Wholesalers: Raising Against Stock and Debtors

Asset based lending (ABL) lets a wholesaler or distributor borrow against its debtor book and warehouse stock in one revolving facility, with receivables advanced at up to 90% and stock at up to 90% of net orderly liquidation value (NOLV). How much you actually raise depends less on the headline rates and more on how much of your ledger and stock a lender treats as eligible. For wholesalers, that comes down to credit notes, retention of title, customer concentration and how quickly your stock turns.

This guide is for owners and finance directors of UK wholesale and distribution businesses who need a facility of £2m or more, typically to fund growth, stock up for peak season, take on larger accounts or refinance an invoice finance line that has run out of headroom. We explain how lenders size a facility for your sector, what reduces availability and how to structure it so the money is there when you need it.

Key facts

• ABL facilities are arranged from £2m to £100m, as one revolving facility across up to four asset classes.
• Receivables are advanced at up to 90% of eligible debtors, and stock at up to 90% of NOLV.
• Owned warehouses can be added at up to 80%, and plant, machinery or vehicles at up to 85% of NOLV.
• Pricing is from 2% over Bank Rate, which is currently 3.75%, on 3 to 5 year terms.
• Trade finance, which pays suppliers at up to 100% of supplier cost for up to 180 days, sits alongside the ABL as a separate facility.
• All finance is subject to status and lender approval, and terms are priced deal by deal.

How asset based lending works for a wholesaler

A wholesale business has most of its value tied up in two places: stock on the shelves and invoices waiting to be paid. ABL turns both into a borrowing base that moves with the business. When you buy stock, the stock line grows. When you ship and invoice, the value moves from the stock line to the debtor line. When customers pay, the cash clears the balance and frees up availability for the next purchase.

The borrowing base

Each week or month you report eligible debtors and stock to the lender on a borrowing base certificate. The lender applies its advance rates to the eligible figures, and the result is what you can draw. Unlike an overdraft, the limit is set by your assets, so availability rises as you trade more.

Where trade finance fits

Many distributors import. ABL cannot fund goods you have not yet received, because there is nothing in the warehouse for the lender to take security over. Trade finance closes that gap by paying the overseas or UK supplier when goods ship, at up to 100% of supplier cost for up to 180 days. When the goods land, they move into the ABL stock line, and when you sell them, the invoice moves into the debtor line. Read our trade finance guide for how that facility works on its own.

What lenders look at in a wholesale business

The headline advance rates are the ceiling. The real question is what share of your assets counts as eligible.

Debtor quality and concentration

Lenders want a broad spread of creditworthy trade customers on sensible terms. If one customer makes up a large share of the ledger, the lender will usually cap how much of that customer's debt it funds. Concentration limits for strong national retailers and large trade buyers are often generous, but they still need negotiating. Debts that run well past their due date, debts owed by connected companies and overseas debts that cannot be credit insured are commonly excluded.

Dilution: credit notes, rebates and returns

This is the issue most specific to wholesale. Retail and trade customers routinely take retrospective rebates, promotional allowances, settlement discounts and credit notes for short deliveries or returns. Each one reduces what the lender eventually collects, so lenders measure your dilution history and adjust the advance rate or hold a reserve to cover it. Tidy, well-documented credit note processes usually earn a better effective advance.

Contra accounts

Some of your customers may also be suppliers. Where you owe a customer money, it could set that off against what it owes you, so lenders typically exclude the overlap from eligible debtors. Mapping contras before a lender's field exam avoids a surprise reduction in availability.

Stock type and retention of title

Lenders fund stock they could sell in an orderly way if they had to. Branded consumer goods, building and electrical products and ambient food and drink with a sensible shelf life tend to attract the best rates. Perishable, fashion-led, slow-moving or highly specialised stock may receive a lower rate or be excluded. Stock still subject to a supplier's retention of title clause is usually excluded until it is paid for, so supplier terms are reviewed early in the process.

Margins and cash flow

ABL is asset backed, but lenders still look at trading. They want gross margin that comfortably covers the cost of finance and a business that is not relying on the facility to fund losses.

How much could you raise?

The table below shows the maximum advance rates for each asset class and the factors that reduce them in a wholesale business.

Stock is advanced against NOLV, not cost: what an independent valuer expects it to fetch in an orderly sale, after costs, which is usually below what you paid. And the rate applies to eligible assets only, so the gap between your gross and eligible figures often matters more than the headline percentage.

If your eligible debtors and stock would support less than £2m, a standalone invoice finance facility at up to 90% of eligible invoices is often a better fit, with a revolving credit facility or trade line alongside. Our stock finance guide covers stock-only options.

Costs, terms and structure

ABL pricing is set deal by deal. Facilities are priced from 2% over Bank Rate, on committed 3 to 5 year terms. The total cost of a facility usually includes:

• Interest on the amount drawn, as a margin over Bank Rate.
• Arrangement fee when the facility is set up.
• Monitoring or service fees to cover the lender's reporting and audits.
• Valuation and field exam costs, including the independent stock appraisal.

Because you only pay interest on what you draw, the cost follows your trading cycle. A distributor that builds stock ahead of peak season draws more for a few months and less once customers pay.

Covenants and reporting

ABL facilities tend to have lighter financial covenants than cash flow loans, because the lender relies on the assets. In return, the reporting is heavier: regular borrowing base certificates, aged debtor and creditor reports, stock reports by line and periodic field exams.

Adding a term loan

Where you are buying a competitor or moving into a new territory, a cash flow term loan can sit alongside the ABL. Senior term loans go up to 4x EBITDA, and acquisition finance up to 5x EBITDA, depending on the deal. Our debt advisory team structures these alongside the ABL so the two facilities work together.

Documents lenders will ask for

Common mistakes wholesalers make

• Sizing on gross figures. Owners often expect the headline rate on the whole ledger and the whole warehouse. Eligibility rules and NOLV mean the real number is lower, so plan on eligible figures.
• Ignoring rebate agreements. Retrospective rebates owed to large customers are a dilution risk. Disclose them early; a lender that finds them in the field exam will be more cautious.
• Leaving retention of title until late. If key suppliers retain title, that stock may be excluded. Review terms before you apply.
• Overlooking the stock appraisal. Clean stock records with ageing and turnover by line make the appraisal easier and the NOLV more favourable.
• Choosing on headline price alone. Concentration limits, reserves and eligibility rules can make a cheaper facility deliver less cash. Compare availability, not just the margin.

How GBF helps

We start by building a credit paper that presents your business the way a lender will assess it, with eligible assets, dilution and stock quality addressed up front. We then approach the lenders best suited to the deal from our whole-of-market panel of 650+ lenders, compare the structures, negotiate terms including concentration limits and advance rates, and manage the process through due diligence to completion. Find out more on our asset based lending for wholesale and distribution page or our wider asset based lending page. We also work with distributors in food and drink and consumer brands.

FAQs

What is the minimum facility size for asset based lending?

We arrange ABL facilities from £2m to £100m. Below £2m, a standalone invoice finance facility is usually more cost effective, with a revolving credit facility or trade line alongside where needed. Finance is subject to status and lender approval.

Can my customers stay unaware of the funding?

Yes, in most cases. The debtor element of an ABL can be run as confidential invoice discounting, so your customers pay you as normal and do not deal with the lender.

Will the lender fund all of my stock?

Usually not. Lenders fund stock they can value and sell, and advance up to 90% of NOLV rather than cost. Perishable, slow-moving or specialised lines, and stock subject to a supplier's retention of title, may be funded at a lower rate or excluded.

Can the facility grow with seasonal peaks?

Yes. Because availability follows your stock and debtors, it rises as you buy ahead of a busy season and falls as stock sells and customers pay. Many lenders will also agree a temporary seasonal increase if you plan it with them in advance.

Is trade finance part of the ABL?

No. Trade finance is a separate facility arranged alongside the ABL. It pays suppliers at up to 100% of supplier cost for up to 180 days, and the goods then move into the ABL stock line once they arrive.

Can I refinance my existing invoice finance facility into an ABL?

Yes. Distributors often move to ABL when an invoice finance facility no longer provides enough headroom, because adding stock and other assets to the borrowing base can increase availability. Our facility health check is a good place to start.

If you would like to know how much your debtors and stock could support, Check what you could raise or call us on 020 3432 2341.

Sources

• Bank of England: Interest rates and Bank Rate

Tom Renshaw

Founder and Managing Director, Growth Business Finance

Tom arranges business loans, asset based lending and property finance for UK SMEs and mid-market companies. More about GBF