Lack of Competition
The highly fragmented ABL market is made up of many
pools of lenders with different risk appetites and asset
class sector expertise. An efficient and competitive environment usually exists within each pool. But a borrower
needs to know which pool to approach for borrowing
and must be able to find appropriate lenders in that
pool. This is no easy task given the current state of the
ABL market, which consists of many specialty lenders.
Borrowers often have difficulty finding the appropriate
pool of lenders or a sufficient number of lenders in the
pool. This inefficiency can lead to higher pricing due to
lack of competition.
High Loan Administration & Origination Costs
Loan administration and origination costs, many of
which are more like fixed costs, drive up the overall
cost of ABL. The cost of initial underwriting and collateral monitoring over time is low for C&I loans. In ABL,
however, there are more complex risk assessments and
mitigation, so more investigation, administration and
oversight of the collateral is required. Unlike C&I loans,
the task of regularly and thoroughly monitoring assets
extends throughout the term of the loan.
The cost of originating proprietary deal flow and
structuring the deal flow to meet the lender’s specific
investment guidelines is also higher in ABL. Origination
cost for a bank is usually limited to cross-selling existing
customers or net working within its regional community.
Specialty finance companies, by contrast, generally
have a very narrow investment focus and are smaller
and more numerous. These ABL lenders don’t usually
venture outside their specialty field, so the cost of
fielding a number of sales people either regionally or
nationally, as a percentage of transaction costs, is much
higher than for banks.
Many smaller businesses don’t qualify for bank financing. The asset-based lending (ABL) marketplace is well devel- oped for providing capital to such smaller businesses with
assets, which may include accounts receivable, inventory, purchase
orders, real estate, machinery, equipment and intellectual property.
However, these ABL loans are more expensive than commercial
and industrial (C&I) loans. Why is this?
Drivers for higher pricing might include:
• Risk — or perception of risk — is higher than C&I profiles
• Lack of competition in the marketplace
• High loan administration and origination costs relative to
• High costs of capital for ABL lenders
Increased Risk or Perception of Risk
Interestingly, the default rates on ABL and C&I loans are similar.
Although the true risk in ABL is similar to that in C&I lending, as
indicated by loan performance, the perception of risk is much higher
for ABL because the borrowers often have issues related to financial
performance, time in business or type of business. This increased
perception of risk by banks will not necessarily be shared by ABL
lenders who are specialists in assessing and managing collateral in a
particular asset class.
Why Is Asset-Based Lending So Expensive?
Comparing Cost Structures for ABL and C&I Loans
BY JEFFREY SWEENE Y
There is a common belief, especially among business borrowers, private equity funds and M&A sponsors,
that inefficiencies leading to predatory pricing exist in the small-cap and lower middle market business
lending space. That assumption may be incorrect because the ABL cost structure is very different in
comparison to inexpensive bank lending. By utilizing a new, more optimized funding structure, ABL firms
may be able to greatly reduce their cost of capital.
JEFFRE Y S WEENE Y
Chairman & CEO,
US Capital Partners
Although the true risk in ABL is similar to that in C&I lending, as indicated
by loan performance, the perception of risk is much higher for ABL because
the borrowers often have issues related to financial performance, time in
business or type of business. This increased perception of risk by banks
will not necessarily be shared by ABL lenders who are specialists in
assessing and managing collateral in a particular asset class.