Uncertainty remains: Asset-based lending’s time to shine

It comes as no surprise that the restrictive monetary policy in the U.S. has tightened the credit environment for commercial borrowers in 2023. Stubborn inflation, recessionary pressures, and the rapid rise in borrowing costs with no near-term retreat in sight combined to weaken demand. For industrial firms and other large-scale borrowers, borrowing capacity is constricting at a time when they need liquidity the most.

Despite the rhetoric in the marketplace around tightening credit conditions, asset-based lending (ABL) remains steadfast. According to a recent study by the Secured Finance Network, “ABL commitments by U.S. lenders totaled about $502.3 billion by the end of 2022, a 10% increase over the previous year.” The study also points out that in the past 6 years through the end of 2022, “ABL lenders have increased their market share of overall [loan] commitments from 31% to 38%.”¹ As lenders evaluate ongoing economic conditions, the use of ABL as a financing tool is expected to continue to provide flexibility and unique value when coupled with thoughtful due diligence and collaboration with your lending partners.

Make smart ABL decisions

ABL lenders like CIBC review each new opportunity on a deal-by-deal basis. While the general tenets of asset-based lending provide for highly monitored, collateral-backed transactions in exchange for flexibility, no two companies and deal structures are the same. Through careful diligence and a thorough understanding of our customer’s cash conversion cycle, we tailor transactions to meet our customers’ needs in any economic environment.

In this current environment, attentive lenders address uncertainty with a more targeted approach to due diligence. Sound ABL structures and corresponding leniency for borrowers are often the result of looking past the top line to better understand what’s driving company performance, regardless of the borrower’s industry. In today’s climate, CIBC continues to:

• Analyze company backlog for current geographic, industry end market, or customer trends. Industrial clients largely enjoy tailwinds relating to supply chains easing, infrastructure spending or the lack of current residential housing stock. Our diligence around each of these targeted examples impacts our decision on how and where to put capital to work.
• Review historical performance pre- and post-COVID to ensure accurate comparable periods. This review has become necessary, given COVID-19 generated significant short-term disruptions, both positive and negative. COVID-era cash flows are often not representative of future performance. 
• Look for the green shoots. It’s important to not make too many assumptions. While the overall economy is uncertain, many of our consumer-facing and industrial customers are doing extremely well, adapting to inflation and maintaining good liquidity. Companies in these situations remain attractive to lenders and can command competitive terms. 

Partner with your lender

ABL options are prospering in the current climate, and for good reason: they offer creative, flexible financing options for businesses with asset-heavy balance sheets. But because ABL deals are unique, lenders are likely to want to work closely with their clients. The better your lender understands your business drivers, the more options they can provide. Regular monitoring of loan and business performance can also help your lender see issues coming and work with you to address them.

In our experience, the best deals are those built between lenders and borrowers with a strong base of trust. To learn more about our creative financing solutions and our capabilities, visit our website. 

Brandon Barr is head of business development and strategy for the CIBC US Asset-Based Lending group.

¹ ABF Journal: Secured Financing Volume Reached Nearly $4.9T in 2022 Opens in a new window.