Best To Avoid the Asset Based Lending Machines

Posted on: October 8th, 2021

asset based lending

Asset based lending is a powerful form of finance that provides valuable capital against the collateral value of business assets. It is generally liquidity enhancing finance that loosens up cash flow for a company, especially in a period of sudden growth. It is provided by bank and non-bank platforms, across a spectrum of risk profiles and business sizes.

As technology and lending algorithms have penetrated the lending business, many new forms of lenders have emerged seeking to aggregate financial assets of their specialty. These new lenders usually have a new age mystique about them as if they have uncovered a secret world of risk understanding. Most of them have fervent belief in the power of their algorithm, that it represents a new vanguard in credit decisioning. There is nothing inherently wrong with believing you have a new and improved way of assessing credit risk. It is when one believes their new way is 100% predictive and reliable and that other traditional ways are meaningless, when things start getting interesting.

Focus of asset based lending

New age asset-based lenders focus less on the softer issues such as management character and trustworthiness. Their focus is on a non-correlated, standalone variable outside of the realm of management influence and company performance, such as the certain recovery value or counterparty credit strength. They pay less attention to the applicability of these variables across industries, stage of company or size of company which results in a haphazard approach to asset acquisition. These lenders are not true middle market asset-based lenders but financial engineers constructing a portfolio of assets, with little skill in understanding, communicating, or serving the needs of their borrowers. They come across as machine-like as organizations with little skill at developing a relationship, due to how departmentalized and layered they are.

New aged asset-based lenders subscribe to the view that lending is more of a science than an art. They usually grow very rapidly upon launch, but then have a tough ride when the portfolio or economy goes south, leaving them dazed and often out of dry powder. Middle market companies are best served by avoiding these asset-based lending machines and finding a lender who takes the time to get to know your company through the art of relationship lending. Relationship lenders consider a host of variables and employ a holistic approach when deciding to lend. They are the more reliable brand of lender and usually go the extra mile for the company, should it face tough times.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.