Asset-based lending enters the mainstream
Once a red flag that a business was in trouble, asset-based loans have become a mainstream product, used by businesses of different types and sizes, depending on the lender.
Commercial financiers, meanwhile, expect the current economic challenges to enhance the attractiveness of this type of debt.
Banks say business customers now routinely use company assets, from inventory to real estate, to secure their debts. Businesses then use the loans to grow, improve operations, and increase cash flow.
“It’s another way to lend, another way to cement a deal,” said John Lewis, president and CEO of Harbor Bank of Maryland.
According to the US Small Business Administration, in a 2017 blog post, business owners who resorted to asset-based lending typically did so when they could not obtain financing from a traditional lender or bank. .
The SBA also noted that asset-based loans tend to be expensive, with high origination and administration costs, and generally require more detailed reporting than other types of commercial credit.
That said, the SBA noted a significant benefit to using business assets as credit collateral: asset-based loans are flexible and have fewer restrictions on their use, allowing companies to turn fixed assets from a balance sheet into cash. rolling.
Today, said Maryanne Gruys, head of business capital at M&T Bank, asset-based lending is “a very common form of lending” and represents a “significant part” of M&T’s middle market portfolio.
“We have a large portfolio,” Gruys said. “(A borrower) could be a manufacturer, a distributor, a service industry. These are businesses that usually go through some sort of event. It could be a recapitalization (or) a turnaround, but our borrowers tend to be asset intensive right now.
While Gruys stressed that asset-based lending requires strong accounting and disciplined financial reporting, she said the trade-off was competitive annual percentage rates.
Ronald Donatelli, president of the Pittsburgh region of First National Bank of Pennsylvania, pointed out that lenders offering asset-based loans offer favorable advance rates – up to 90% on receivables and up to 60% on stocks – which are not available with other products.
Donatelli also pointed to the requirements associated with asset-based lending and said the stringent requirements could help businesses.
“It should be noted that asset-based lending often comes with more monitoring and reporting requirements than what you would see in a treasury arrangement,” Donatelli said in an email. “Ultimately, it also provides company management with greater insight into business performance and cash usage – which can be of further benefit to the borrower. .to help generate cash flow and liquidity.”
Despite the country’s current economic turmoil, commercial lenders remain relatively bullish on asset-based lending. Secured Finance Network’s Q1 Asset-Based Lending Index found that overall lender confidence remained positive, although it was down 8 points from the last quarter of 2021.
Lenders surveyed were the most pessimistic about overall economic conditions. But they were largely optimistic that companies taking out asset-based loans would put the money to good use.
Lewis, of Harbor Bank, said his institution had not seen a surge in demand for loans secured by commercial guarantees. But as a community lender, he said, his bank has always provided a significant amount of asset-based lending.
“We are a CBL, so we see trade deals of all types. If there is a business that needs funding, we have seen it and know how to secure it,” he said.
Other lenders predict asset-based lending will grow in popularity, primarily due to the challenges businesses face in the global economy, including supply chain issues, inflation, rising interest rates and increased transportation and labor costs.
With cash flow tightening and working capital cycles compressing, Donatelli said, asset-based lending has become increasingly popular with businesses in need of credit.
“That could make ABL particularly attractive in our current economic environment,” Donatelli said. “Instead of just focusing on metrics like (earnings before interest, taxes, depreciation, and amortization), asset-based lending takes a closer look at assets like receivables and inventory to determine how much a business can borrow.”
Given the current economic hurdles, including supply chain constraints, Gruys said asset-based lending is one more way M&T Bank can boost customers’ access to credit.
“This business is aligned with our community banking model,” Gruys said. “We provide creative financing solutions and think outside the box.”