While asset-based lending (ABL) is traditionally viewed as an expensive option compared to commercial bank lenders, the current banking landscape suggests significant opportunities for ABLs to grow their portfolios are beginning to take shape. The recent demise of Silicon Valley Bank, Signature Bank — and the equally jaw-dropping takeover of First Republic Bank by JPMorgan Chase & Co. — signal a sea change is well underway. Those failures, along with recent shifts in the credit policies of traditional lenders, are significantly reducing the number of inexpensive credit options from which borrowers can choose.
In fact, a number of warning signs have surfaced recently which would suggest commercial banks are becoming much more cautious about taking on less credit-worthy borrowers, as well as applying more stringent lending criteria for keeping existing loans in their portfolio.
In what many would characterize as a classic understatement, U.S. Treasury Secretary Janet Yellen recently suggested banks are likely to become more cautious and may tighten lending even further. “We already saw some tightening of lending standards in the banking system prior to that episode (failure of SVB),” Yellen said, “and there may be some more to come.”
Another significant warning sign surfaced in March. Bank lending in the U.S. contracted by a record amount in the last two weeks of March, indicating a tightening of credit conditions. Commercial bank lending dropped nearly $105 billion in the two weeks ending March 29, the most in Federal Reserve data going back to 1973.
The pullback in total lending in the last half of March was broad and included fewer real estate loans, as well as fewer commercial and industrial loans. Furthermore, the American Bankers Association index of credit conditions fell to the lowest level since the onset of the pandemic, indicating bank economists see credit conditions weakening over the next six months. As a result, banks are likely to become more cautious about extending credit.
Looking for Relief
These issues will most likely result in a significant number of borrowers needing to look for new lenders. Borrowers who cannot obtain credit facilities from traditional lenders will be searching for viable alternatives such as bank and non-bank asset-based lenders which are in a better position to handle their credit requirements.
This opportunity is further supported by the recently released 2022 survey of bank and non-bank ABL lenders by the firm Secured Finance Network (SFNet), which focused on key indicators for its quarterly Asset-Based Lending Index and SFNet Confidence Index. The survey showed steady confidence in the asset-based lending market and asset-based lenders maintained a positive outlook despite persistent inflation and rising interest rates.
“As the U.S. economy remains under stress, the asset-based lending industry is primed to meet new demand,” said SFNet CEO Richard D. Gumbrecht. “Commitments have increased, and portfolio performance remains solid. Should we see a recession, the ABL industry stands ready to provide vital working capital.”
The SFNet survey also revealed some interesting comparisons of bank and non-bank asset-based lenders. For banks, asset-based loan commitments (total committed credit lines) were up 2.4% in the fourth quarter compared to the previous quarter. However, their “outstandings” (total asset-based loans outstanding) for the same period fell by 1.6%. Lower new commitments and higher commitment runoff reduced net commitments in Q4, the second consecutive quarter of decline.
Non-bank ABL lenders, however, saw total commitments rise by 6% last quarter. Total outstandings were up, as well, by 1.7%. Compared to the same quarter last year, total commitments and outstandings for non-banks rose by 10.4% and 18.6%, respectively. The SFNet report stated: “Further, a large majority of non-banks reported increased new commitments in Q4, which grew by 277% from Q3” which is an indicator that non-bank lenders have a significant advantage in expanding their loan portfolios.
Gaining Competitive Edge
This substantial increase in non-bank asset-based lender commitments reflects the reality that they have an edge in attracting new borrowers as they do not face the same regulations that bank-based asset-based lenders are bound by. They are allowed to take more risks in lending by increasing advance rates on traditional assets such as accounts receivable and inventory, as well as expanding the collateral pool to non-traditional ABL assets such as trademarks, real estate, and a broad range of equipment.
Utilizing non-bank ABLs offers an opportunity for businesses to increase their borrowing capacity, a necessity for increased liquidity to operate a business. However, it comes with a price, with increased costs associated with higher interest rates, collateral monitoring fees, and other related expenses.
While the time is right for asset-
based lenders to increase their loan portfolios substantially, the economy will eventually improve, and businesses’ performance will recover to pre-
pandemic levels as well. Asset-based lenders should prepare for this and offer options that will substantially lower the borrower’s costs when this economic shift occurs, in an effort to retain the businesses for the long run.
Bill Lawrence is a Principal at Seattle-based restructuring and corporate advisory firm Revitalization Partners. He and his partners write regularly about the operational and financial challenges companies face in successfully restructuring companies. Learn more in the firm’s blog as well as its e-book, “Insights to Grow, Build or Save Your Business!”
