This unexpected bump in activity will instil confidence and may lead other businesses to consider a merger or acquisition; but how will these future deals be funded?

As a business goes through its corporate lifecycle, there will be defining moments which require financial support from a third-party lender. This rise in M&A activity suggests that many businesses feel that the time is right to grow their organisation through merging with a similar-sized firm, or being acquired by a far larger strategic target. At the beginning of this process, it is crucial for businesses to consider what the best financing options are and to review the range of options available.

Why ABL shouldn’t be the last choice for M&A

Asset based lending (ABL) is a funding solution that is well-suited for strategic business decisions such as a merger or acquisition, yet not all businesses consider it a viable option for financing these transactions. In essence, it unlocks the potential of any debt-free assets listed on a business’s balance sheet, from invoice finance, inventory, plant, machinery and other valuable equipment, through to commercial property. 

These assets combined can generate funding for the acquisition as well as providing working capital once the transaction is complete. Items like these can be used as collateral to help an organisation improve its cash position during the acquisition process by extending credit against their value. If necessary, an additional cash loan above the value of these assets can be offered to increase the amount available to part-fund the acquisition.

By its very nature, ABL is flexible enough to cope with the transitional nature of a business going through a merger or acquisition. Businesses may consider this fact when in the initial stages of completion. Many of these transactions experience unforeseen problems, but ABL’s focus on assets means that these solutions are better able to accommodate these issues, especially compared to more traditional options.

Why not bank financing?

M&A transactions are typically financed using cash, private equity, debt or a layered combination of these. This choice will normally depend on a number of factors: the current capital market conditions, the creditworthiness of the acquiring and target firms, and the size of the deal, among others. Each deal is different.

A traditional lender will look first at the cash flow within a business, and then to its collateral. ABL provides an alternative by looking at collateral in the first instance, followed by the debt load and the quality of earnings within a business. A trusted ABL provider will also be able to advise the business on how to maximise the liquidity of the assets on the balance sheet, as well as minimise the risks of the execution.

ABL can be a favourable and cost-effective alternative in that it is most suitable for companies which aren’t cash rich, but have an abundance of assets on their balance sheet. The more industrial sectors such as manufacturing could benefit most from this solution.

What does this mean for UK business growth?

It is important to remember that M&A activity is always prone to fluctuation, and even more so during periods of political and economic uncertainty. Given the high levels of concern that the UK would lose its market attractiveness post-Brexit, the frequency of deals completing is a positive indication that the economy is continuing in the right direction.

Businesses based in global markets with strong currencies will certainly continue to take advantage of sterling’s low valuation in current exchange rates and look to acquire businesses backed by GBP. Both SMEs and large corporates involved in these deals will need to consider the full range of funding options before the completion process comes to an end, and bear in mind what would work best for their particular deal.