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Asset-based lending comes into the mainstream

Harbor Bank COO and President John Lewis said asset-based loans were an important tool for community banks to have available for their clients. (Submitted Photo)

Once a red flag indicating a business was in trouble, asset-based loans have become a mainstream product, used by enterprises of various types and sizes, lenders say.

Commercial financiers, meanwhile, expect ongoing economic challenges to boost the attractiveness of this type of debt.

Banks say commercial customers now regularly use business assets, from inventory to real estate, to secure debt. The firms then use the loans to grow, improve operations and expand liquidity.

“It’s another way to lend, another way to shore up a deal,” said John Lewis, president and COO of The Harbor Bank of Maryland.

According to the U.S. Small Business Administration, in a 2017 blog post, company owners who resorted to asset-based loans typically did so when they couldn’t secure funding with a traditional lender or bank.

The SBA also noted that asset-based loans tend to be expensive, with high origination and administrative costs, and generally require more extensive reporting than other types of commercial credit.

That said, the SBA noted a significant upside to using commercial assets as collateral for credit: Asset-based loans are flexible and have fewer restrictions on their use, allowing businesses to turn fixed assets on a balance sheet into working capital.

Today, said Maryanne Gruys, head of M&T Bank business capital, asset-based loans are “a very mainstream form of lending” and represent a “meaningful share” of M&T’s middle market portfolio.

“We have a broad portfolio,” Gruys said. “(A borrower) could be a manufacturer, a distributor, a service industry. These are companies that are typically going through some sort of event. It could be a recapitalization (or) a turnaround situation, but our borrowers tend to be currently asset-intensive.”

While Gruys emphasized that asset-based loans require strong bookkeeping and disciplined financial reporting, she said the tradeoff was competitive annual percentage rates.

Ronald Donatelli, president of First National Bank of Pennsylvania’s Pittsburgh region, emphasized that lenders providing asset-based loans offer favorable advance rates — as much as 90% on receivables and up to 60% on inventory — that are unavailable with other products.

Donatelli also pointed to the demands associated with asset-based loans and said the rigorous requirements could help companies.

“It is worth noting that asset-based loans often come with more monitoring and reporting requirements than you would see in a cash flow deal,” Donatelli said in an email. “Ultimately, this also offers company management more insight into the company’s performance and use of cash — which can be to the borrower’s further benefit … to help generate cash flow and liquidity.”

Despite the nation’s current economic turmoil, commercial lenders remain relatively bullish on asset-based lending. Secured Finance Network’s first-quarter asset-based lending index found overall lender confidence remained positive, though it was down 8 points from the last quarter of 2021.

Lenders surveyed were most pessimistic about overall business conditions. But they were largely optimistic that companies taking out asset-based loans would put the money to good use.

Harbor Bank’s Lewis said his institution had not experienced an uptick in demand for loans backed by business collateral. But as a community-based lender, he said, his bank has always done a significant amount of asset-based lending.

“We’re a CBL, so we see commercial deals of all types. If there’s a business that needs financing, we’ve seen it and know how to underwrite it,” he said.

Other lenders predict asset-based loans will grow in popularity, primarily because of the challenges businesses face in the global economy, including supply chain problems, inflation, rising interest rates, and increased transportation and labor costs.

With tightening cash flows and compressed working capital cycles, Donatelli said, asset-based loans have become increasingly popular with firms that need credit.

“This could make ABL particularly attractive in our current economic environment,” Donatelli said. “Instead of focusing solely on metrics such as (earnings before interest, taxes, depreciation and amortization), asset-based lending looks more closely at assets such as receivables and inventory to determine how much a company can borrow.”

Given current economic obstacles, notably supply chain constraints, Gruys said asset-based lending was one more way M&T Bank could boost customers’ access to credit.

“This business is aligned with our community banking model,” Gruys said. “We provide creative solutions in financing, and we think outside the box.”

This article has been updated to correct John Lewis’ title. He is president and COO of Harbor Bank.