Capital Markets

Asset-Backed Lenders Ride to the Rescue

Dollar volumes in asset-backed lending and factoring businesses increased in 2007, just as other fund-raising channels were contracting.
Vincent RyanJuly 17, 2008

While other sources of corporate credit dried up, asset-backed lenders stepped in to supply a healthy flow of funds. The volume of outstanding asset-backed loans to companies grew to $545 billion at the end of last year, according to the latest survey from the Commercial Finance Association. That’s up 11 percent from 2006 and more than 25 percent from three years ago.

Asset-backed lending has seen similar spikes in past years when credit was scarce, most notably in 1979, a year of inflation and energy shocks, and 1984, when the S&L crisis started unfolding.

“Our members fill an important gap in tumultuous credit environments,” said Andrej Suskavcevic, CEO of the Commercial Finance Association, in a press release. “Companies are still able to obtain financing to meet their needs, and they’re
doing it by utilizing their assets — ranging from accounts receivable and inventory to intellectual property, equipment and real estate — as collateral.”

The dollar volumes in factoring, a particular form of asset-based lending, also grew, to $135 billion in 2007, up 6.5%. That was lower than the 12.7% growth of factoring in 2006, but on par with the median yearly increase the past 30 years, the CFA said.

In factoring — a popular funding solution for small businesses — a company sells its accounts receivable invoices (at a discount) to a third party, which then assumes the obligations of collecting. Factoring is used heavily in the textile and apparel industry, as well as other businesses that sell to retailers.

The growth in asset-based lending and factoring is indicative of another trend: higher borrowing costs, particularly for companies deemed less creditworthy. Locked out of unsecured funding sources, companies that borrow from asset-based lenders usually have to fork over hefty premiums for the privilege. Interest rates can range from 12 percent to 15 percent, and more.

To size the market for asset-based lending, the CFA survey, conducted by R.S. Carmichael & Co., an independent market research firm, polled 300 CFA-member companies. Twenty-four percent of CFA members are banks, the rest non-bank financial institutions. R.S. Carmichael also used secondary data sources such as government agencies and trade groups.