As the economy recovers, traditional lenders are showing the kind of caution for which they’ve long been known when it comes to making loans. This renewed fiscal conservatism shows that they might have learned a difficult lesson during the recession but their hesitation to lend is curbing small business growth. This situation has resulted in a business boom for asset-based lenders.
Asset-based lending differs from traditional lending because it considers “collateral, rather than credit worthiness” when lenders weight the merits of making the loan according to Kyle Stock who writes for the Wall street Journal. Some might equate this higher risk financing scenario to a modified form of the pawn-shop business model. If a business defaults on the loan, the lender seizes equipment or other assets that were put up as loan collateral. In addition, the borrower typically pays higher interest rates for these loans.
About $600 billion in asset-based financing, not including mortgages, was arranged in 2008. This level was an 8.3% jump from the previous year and analysts expect that the final figures for 2009 will show double digit growth. While many large banks have a presence in this market – think Bank of America and Wells Fargo – many specialty capital lending businesses have opened their doors in the last couple of years. These lenders are all competing for business borrowers, even small firms with revenues under $3 million.
Look for competition to heat up in the asset-based lending sector as small businesses begin to look for new financing alternatives and as lenders market their programs to gain market share.[Source: Stock, Kyle. Asset-Based Lending Grows in Popularity, Wall Street Journal 2.2.10]