Overview
Asset Based Lending (ABL) refers to issuing loans secured by collateral that can be seized if the loan is not paid. This collateral is in the form of fixed assets such as land, buildings, plants, or machinery. This type of lending is prevalent for businesses that have trouble raising capital in traditional ways due to lower creditworthiness or limited operating history.
Asset-based loans serve various financial needs for businesses in diverse situations. For example, startups benefit from ABL due to their limited financial history, while seasonal businesses utilize ABL to manage cash flow fluctuations. These loans provide short-term working capital for day-to-day operations and support businesses facing financial distress, delivering access to cash during restructuring. Overall, ABL is a flexible financing solution for businesses, leveraging their assets to access capital when needed.
Evolution and Development in ABL
Asset-based lending has evolved significantly since its inception in the early 20th century, transitioning from a means to finance inventory to a versatile financing option for businesses. Initially, businesses would borrow funds based on the value of their inventory, using it as collateral due to limited cash flow.
Over time, as businesses grew and became more complex, ABL adapted to meet their evolving needs. It expanded to encompass a broader range of assets, including accounts receivable, machinery, and real estate, enabling businesses to borrow against various assets for inventory financing, business expansion, and other needs.
Today, asset-based lending serves as a crucial source of financing for businesses of all sizes, offering flexibility and versatility in collateral options to support growth and success.
Increasing Usage and Acceptance of ABL as a funding source
ABL is gaining popularity with businesses and lenders, who relied heavily on government-backed loan schemes during the COVID-19 pandemic. With the current rise in interest rates and inflation, there is increased caution in the debt market. As the economy stabilizes, asset-based lending emerges as a favorable option for lenders due to its enhanced collateral choices.
Businesses are also turning to alternative finance companies due to stricter credit conditions at traditional banks. With many pandemic-related loan schemes reaching maturity, businesses need to refinance their facilities, and ABL is becoming a preferred option due to its increased security for lenders. In the UK, even though a recession was avoided, businesses still face challenges from inflation and rising costs, making ABL an important financing option, especially for those in distressed or turnaround situations.
Market Size and Growth
The market for asset-based lending has experienced significant growth in recent years and is projected to increase from $698 billion to $787 billion by the end of 2024, with a compound annual growth rate (CAGR) of 12.8%. Past growth can be explained by factors such as economic downturns, challenges in obtaining credit, the demand for financing for working capital, the cyclical nature of industries, corporate restructuring, turnarounds, and situations where businesses have valuable assets but face a shortage of liquid cash.
The market is anticipated to grow further in the next few years, growing to $1,263 billion in 2028 at a CAGR of 12.5%. The forecasted rise can be attributed to global economic trends and volatility, increased demand for non-traditional financing, the expanding role in cross-border transactions, the focus on working capital optimization, and industry-specific tailoring.
US Asset-Based Lending Market
According to a report by Fortune Business Insights, North America dominates the ABL market with a 49% share. Traditional banks account for about 87% of the market share. However, non-bank lenders increasingly play a role, focusing on niche sectors and smaller businesses. Some major players in the US ABL market include Bank of America, Wells Fargo, JPMorgan Chase, PNC Financial Services, and CIT Group.
Specific situations:
- Startups: Due to a limited financial history, new businesses face challenges securing traditional loans. Asset-based lending provides an alternative by allowing them to use their inventory, receivables, or intellectual property as collateral to access funding.
- Seasonal businesses: Businesses with seasonal fluctuations, such as retail stores, agricultural operations, or tourism-related ventures, often experience fluctuations in revenue throughout the year. Asset-backed loans can help smooth out cash flow challenges during slow seasons by leveraging assets to secure financing when needed.
- Importers and exporters: For businesses involved in importing and exporting, asset-based lending can be used to secure financing for inventory or receivables linked to international trade. ABL is particularly beneficial for these businesses as international transactions often come with extended payment cycles.
- Distressed companies: Businesses facing financial distress or undergoing restructuring efforts may struggle to access traditional financing options due to weakened credit profiles. Asset-backed loans provide a viable alternative for companies to stabilize operations, implement strategic changes, and regain financial health by leveraging existing assets as collateral.
Challenges and Risks Involved in Asset-Backed Loans
- Asset valuation risk: Accurate asset valuation can be challenging, leading to potential discrepancies between the perceived and actual value. If assets are overvalued, it may result in inadequate collateral coverage, posing a risk to lenders if the borrower defaults.
- Liquidity and Operational risk: If the collateral is illiquid or not easily convertible into cash, the lender may encounter challenges in recovering the outstanding loan amount. Furthermore, the borrower's operational inefficiencies, mismanagement, or internal issues can contribute to financial distress, affecting their ability to fulfill loan obligations.
- Complexity and opacity: Complex ABS structures and underlying asset pools can be challenging to analyze and understand, increasing investment risk.
Asset-based lending is a complicated process that involves assessing and tracking different assets, arranging the loan agreement, and handling collateral. Therefore, it is mostly handled by specialized financing companies.
Lenders need to carefully check the borrower's financial situation and evaluate the quality and liquidity of the collateral being offered. Continuously monitoring and regularly reviewing the value of the collateral is crucial to reducing risk during the loan period.
Overall, ABL can be a powerful tool for businesses seeking to unlock the value of their assets and gain access to much-needed capital.
How Evalueserve can support Asset Based Lending
We partner with corporate and commercial banking teams and alternative lenders across the lending lifecycle. Our technology-enhanced services combine domain knowledge with data analytics expertise and technology accelerators to make your processes more accurate and efficient. Our solutions for ABL include:
