Emerging Trends in Specialty Finance: Asset-Based Lending

A continuing retreat

As traditional banks reduce their lending to small and medium-sized enterprises (SMEs), a growing opportunity has emerged for private credit managers to support these businesses through asset-based loans. This shift is highlighted by the increasing popularity of loans secured by assets such as accounts receivable, inventory, and equipment.

Alternative credit

Over the past 18 months, there has been a significant shift in the landscape. With approximately 300,000 mid-market companies in the US and only 15,000 backed by private equity, a substantial market remains primarily served by banks, which are tightening their credit criteria. This tightening has led to more SMEs seeking non-bank financing solutions.The post-financial crisis era has seen non-bank lenders gain traction in asset-based consumer lending. This trend is now extending to small business lending, which is seen as more compelling due to fundamental market changes. Non-bank originations continue to grow, particularly in invoice receivables and equipment financing.Economic uncertainty drives SMEs to explore asset-based lending, especially when traditional financing options are limited. Borrowers are increasingly looking to leverage intellectual property and other assets.The need for banks to deleverage has created a gap in the market, offering opportunities for credit funds to step in. The flexibility of non-bank originators to lend and buy assets as per the company's needs is seen as a significant advantage. There is strong potential in partnering with originators. A robust pipeline of well-capitalized companies is seeking long-term credit solutions.

Similarly, flexible, asset-based financial products are providing capital to mid-market businesses against receivables, inventory, and machinery. In summary, the specialty finance sector, particularly asset-based lending, is poised for growth as traditional banks pull back. The adaptability of non-bank lenders and their tailored financial solutions are critical in supporting SMEs during this transitional period.

The information in this article is derived from online research and internal resources of Menara Capital Ltd.