For some independent asset-based lenders, securing sufficient operating capital is becoming a growing problem. Why? Because increased regulatory scrutiny on credit quality following the first quarter’s bank failures is causing banks to rethink their lending practices. As part of this tightening trend, banks have begun to reduce warehouse lines of credit for independent asset-based lenders, limiting their capacity to take on new deals and stymying growth. This is true in every sector, but especially in distressed categories such as transportation and agriculture.
The threat of scarce lending capital comes at a bad time for independents. After more than two years of post-pandemic, stimulus-fueled growth, strong deal flow and excellent portfolio performance, the financial landscape has changed dramatically. Today, higher interest rates and high inflation have combined with distorted asset values in some sectors to suppress demand and slow deal flow.
To grow and thrive, independent asset-based lenders are looking for strategies they can use to sustain the momentum built over the last two-plus years. The key to any of those strategies is being able to count on the bank or banks that fund it.
To continue benefiting from the full measure of their bank’s support for their warehouse lines of credit (LOCs), independent lenders need to demonstrate that they’re in lockstep with the bank and its interests. Over our 25 years working with lenders of all types and sizes, we have identified five behaviors that can do just that.
- Assess your loan portfolio – Conduct a thorough analysis of your entire portfolio – not only balances and days outstanding, but historic trends that might indicate changes in customer payment behavior. Today, it’s especially important to note deviations by industry sector or region, some of which are being adversely affected by today’s changing circumstances.
- Shed or write off irretrievable assets and balances – the one bad apple syndrome. One or two bad loans can signal to a bank that your underwriting and/or collecting capabilities are substandard, shaking their confidence and putting you at a disadvantage as you negotiate for continued or expanded credit.
- Show the status and condition of collateralized assets – An often overlooked and under-valued exercise, your ability to present a thorough understanding of the location and condition of collateral assets can help assure your bank that you’re taking this important dimension of portfolio value into consideration – and you’re managing it.
- Get third party affirmation of your portfolio’s current market value and asset condition – Some collections and recovery firms offering full-cycle solutions can provide deeply researched and documented analyses and reporting to validate your findings. An additional benefit is that these companies are then well-positioned to act if increased collection or recovery action is merited.
- Update and share your growth plan – Credit may be tightening, but banks still have a shareholder mandate to grow. Show them how you will leverage your rigorous portfolio and asset management to accelerate growth.
Conclusion
Trying times are ahead for asset-based lenders, but by getting out in front of their banks’ tightening credit policies, forward-thinking independents can continue to count on the support they need to thrive.