In an economy that is recovering, but still uncertain, asset-based lending remains a viable alternative for many businesses, showing its resilience through business cycles. Companies still expect to seek financing in 2011 and beyond, and there are positive signs indicating that ABL activity won't dry up.
The worst financial crisis since the Great Depression has had lingering effects on job growth, consumer spending, home ownership, the stock market and overall economic activity. The instability from the downturn has made many businesses cautious about the sustainability of recent growth, with many still being conservative when it comes to expansion and seeking more capital. This climate is one in which few expect a surge in loan demand. Yet it also serves to keep asset-based lending (ABL) in the forefront as the alternative solution for many businesses.
The end of 2010 marked a slow rebirth of asset-lending activities. The competition began to come back, and borrowers increasingly explored the capital markets to finance and restructure their balance sheets. Asset-based loan activity in 2010 was 50% higher compared with 2009. When credit market collapsed, ABL all but disappeared. By early 2009, less than a handful of lenders were active in the arrangement and syndication of asset-based credit lines. However, as the economy started to improve, new entrants to the ABL market started to reshape the lending environment, which sees increasingly more activity.
For businesses, asset-based loans are very flexible and easy to implement, they also have light covenant structures. Lenders, on the other side, are interested in ABL solutions because hard collateral represents a solid guarantee.
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