Asset-Based Lenders Closing Doors, Tightening Credit

Asset-based lenders (ABL) are an important part of the entire commercial lending industry in the United States. ABL lenders primarily loan money to businesses for working capital and use assets like accounts receivable, inventory, equipment, and real estate to secure their loans.

In terms of risk, ABL lenders are willing to take slightly higher risks on their loans than traditional banks, but are unwilling to take the kind of risks that factoring companies take. ABL loans work much like traditional lines of credit in the sense that the borrower submits a borrowing base certificate when they need to borrow, which computes the amount of cash they can borrow during that draw. Traditional bank lines of credit allow the borrower to decide when to reduce the amount of their outstanding line of credit, whereas ABL lenders reduce their loan by incoming payments that flow through a lender-controlled lock box.

Most ABL lenders expect borrowers to maintain at least $1 million in outstanding balances. Some go much higher, with CIT Financial, for example, requiring a $5 million dollar minimum outstanding. A very small ABL lenders will make loans where the average outstanding funds employed are in the $500,000 range.

Advantages of ABL lines of credit include:  

• Availability of much higher lines of credit
• Lines of credit can grow rapidly with company expansion / growth
• Less expensive than using a commercial factoring company  

Companies generally need the following characteristics in order to qualify for an ABL line of credit:  

• Positive net worth
• Strong customer base with no significant concentration of credit
• Several years of profitability  

Many small and mid-market companies use ABL lines of credit as their primary source of working capital.

During the last month, a number of commercial (non-bank) ABL lenders have decided to close their doors or stop making ABL loans until the market improves. Others have become choosier about the loans they will make. Most notably, Textron Financial, a very large ABL lender, announced in mid-October that it was closing its ABL lending group. Several other large ABL lenders are reportedly in trouble.

Several days ago I spoke with a professional employment recruiter who specializes in placing ABL loan professionals. I called him to get his sense of what was happening in the industry and because I knew he would be able to steer me in the direction of ABL lenders who are making loans in today's environment. He told me that he is seeing numerous resumes of ABL professionals come across his desk with no place to put them. Many are from the same companies. His analysis was that big changes are occurring in the industry.

This is particularly troublesome because commercial banks are sending traditional line of credit customers packing in an alarming rate. Three months ago, these customers would have moved from a traditional bank line of credit to an ABL line of credit. Now ABL lenders who are loaning money are very hard to find. One year ago, the average cost of a $3 million ABL line of credit was 9 – 13% APR. Within the last month I have been working on three deals involving three different lenders where the rate is 11 – 14%. In two cases, the ABL lender who had committed to a deal pulled out after they had verbally informed my client they would make the loan. In neither case was the client's situation a factor. In both cases, management of the ABL lender made decisions to reduce their portfolio size or stop making loans altogether.

If you are a traditional bank loan customer and are now faced with the daunting task of looking for an ABL lender, feel free to contact me and I will try to steer you in the direction of an ABL lender that will fit your company's needs.