Exploring a new growth strategy for asset-based lenders

Asset-based lending relationships have changed. Discover new ways to stay up-to-date in a changing economic landscape.

Asset-based lending (ABL) began in the 1970s when handshakes were everything in business, and the biggest technological advancement was the invention of the floppy disk. Fast-forward to the beginning of the 2020s, and Gartner forecast that 80% of all B2B sales interactions between suppliers and buyers would be digital ones.  

While structured finance products don’t fly off of shelves like custom furniture advertised on Instagram and sold on Shopify, you’ve probably noticed a key industry shift already: The way ABL relationships are launched and serviced has changed, accelerated by the COVID-19 pandemic. The time is now for independent ABLs who want to stay relevant to look toward new growth strategies. 

What should ABLs be watching in the current market?  

You are witnessing a sea change in terms of competition. With fewer people meeting face to face during the pandemic, and millennials driving the demand for seller-free sales, the focus has shifted away from personal relationship building and relationship maintenance. Businesses are investing more in digital marketing to source acquisitions. For banks and independent ABLs alike, the drivers of new transactions and portfolio growth are: 

  • Deal terms 
  • Pricing 

What does this mean for borrowers? Borrowers have more tools to independently evaluate opportunities in terms of their cost of funds going forward and the multiples being offered for their businesses.    

Another important change you’ve noticed is bank mergers trending upward.  

Consolidation’s role in the shifting ABL space  

Bank mergers, defined by as “calculated by dividing the number of banks that merged during the year by the number of banks in existence at the beginning of the year” reached levels not seen since the 2008 Financial Crisis by 2021. 

Despite rising bank mergers, the fact is that loan demand remains tepid, and net margins are the lowest in history. Fortunately for banks, which dominate the ABL industry, access to the latest information technology, marketing programs, and financial software, have helped bring operating costs down. 

The most obvious growth strategy for community and regional banks in this environment? Scale up by acquiring small-ticket ABLs and factors.     

Where ABLs and banks compete 

There will certainly continue to be competition between ABLs and banks on the small portion of the market that overlaps. Looking at credit risk, the highest risk borrowers at a bank and the lowest risk borrowers at an ABL typically overlap. That’s where the competition takes place.  

Looking ahead, what lending opportunities are left on the table for ABLs? We see opps persisting in markets that are not entirely embraced by banks, such as direct-to-consumer retail where brick-and-mortar aren’t in play. 

Can the history of ABL guide market participants now?   

There aren’t many parallels between today’s market and the environment of 20 years ago. Let's take a look at what has changed: 

  • Capital markets are much more efficient than they used to be. 
  • Non-banks have far greater access to markets and liquidity. 
  • Big Tech has steered dramatic changes to the economy. 
  • Compliance and bank underwriting standards have become significantly more demanding.  

In this environment, unlike in the past, there seems to be little value for banks in acquiring large-ticket independent ABLs. On the other hand, if the federal government does not have the ability to bail out lenders in the next downturn, then yes, there could be an increase in opportunistic acquisitions.   

How ABLs can compete in this new environment 

Amid all these changes, you’ve probably seen an impact to inventory and receivables. And yet your SBA clients continue to scale and seek access to financing for things like building and equipment purchases, partner buyouts and the like. In order to keep your clients from turning to corporate financial services, and taking a line of credit with them, you will need to facilitate a solution. 

Partnering with an SBA lender is one solution that can give your sales team more to talk about and provide growth opportunities into the future.  

How can an ABL partner with an SBA Lender?   

Asset-based lenders have been welcoming non-bank SBA Lenders to discuss how our 7(a) lending capability can support ABL. Forward-thinking ABLs understand that to remain competitive in their market, they need to serve clients with a more differentiated offering. For many of our partners, that differentiator can be the addition of a term loan option.   

Benefits of partnering with an SBA lender

  • Get more deals done 
  • Expand on the business you’re currently doing with your partners 
  • Compete with ABL lenders who don’t have access to a term lender
  • Avert competition for cross-sell products such as deposits (we don’t do them)  

If you’re interested in finding out if an SBA lender partnership is right for your growth strategy, talk with us today. We look forward to hearing about your needs. 

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