A New Breed of Asset-Based Lenders

Asset-based lending (ABL) often comes under fire from critics who claim these loans drive borrowers to default, but it can be a useful tool. ABL provides liquidity to both distressed companies undergoing a turnaround process and growing companies looking to expand. It’s more expensive than traditional borrowing, but generally an ABL arrangement gives the borrower access to the lender’s expertise—which some midmarket businesses find to be worth the steep price tag, even if they have a number of borrowing options.

ABL emerged as a popular solution in the early 1990s, as an alternative for companies that had liquid assets on their balance sheet but could not secure traditional financing based on their earnings. Before long, the market became highly commoditized, and bankers’ decisions about how much liquidity to provide an organization became driven by a standardized borrowing-base formula. The years that followed saw little innovation in ABL; banks continued to offer formulaic, cookie-cutter products that did not accommodate companies with unusual characteristics, seasonal attributes, or atypical business cycles. Asset-based lenders became known as “lenders of last resort,” and the industry was often associated with failing companies and bankruptcy.