A Survey of Non-bank Asset-based Lenders in the Middle and Lower Middle Market - March 2021

Survey of Non-Bank Asset-based Lenders

Non-Bank ABL Lenders Expect a Boom in the Lower Middle Market

***Rush Street Capital recently conducted a conversational market survey with roughly forty Middle Market and Lower Middle Market non-bank asset-based finance companies to assess the various aspects of product offerings, 2020 performance, and overall outlook for 2021.

Average Loan Size in 2020

            Through the results of the market survey, the average loan size issued by non-bank asset-based lenders in 2020 was roughly $8.8 million. The lowest average reported was $0.3 million, and the highest being $50.0 million. 1 Firm reported that no loans were issued in 2020. Typical Loan size varies significantly amongst non-bank ABL finance companies. Many of these sources of capital have historically focused on lower middle market companies whose capital requirements fall below traditional bank thresholds by offering loan and lines of credits in amounts well under $1.0 million. Much larger non-bank ABL lending institutions have arisen in recent years to tailor to businesses and portfolio companies in the Middle Market as well, where much larger, sometimes public, companies had less access to alternative lending options.

Private Equity Activity

      The average percentage of Private Equity-owned companies in lending portfolios of non-bank asset-based lending finance companies is 11.8%. The lowest percentage being 0.0%, and the highest percentage being 80.0%. In addition to traditional family and founder-owned businesses, non-bank ABL finance companies have become an attractive option to Private Equity firms and financial sponsors who seek alternative lending options when a portfolio company is experiencing difficulties with their commercial bank lenders and when potential acquisitions are unfavorable, due to size, industry, customer base, or other characteristic. Although serving as a more expensive option to these firms as previously mentioned, non-bank ABL finance companies’ value Private Equity relationships and view these clients as desirable, high credits who often have a higher financial aptitude than a traditional founder-owned business.

2020 Overall Activity

Through the market survey, the 4th Quarter 2020 saw the most activity amongst non-bank asset-based finance companies with over 80.0% reporting that it was its most active quarter either solely, or in combination with other quarters of the year. Over 40.0% reported that 1st Quarter 2020 was its most active quarter either solely, or in combination with other quarters of the year. Roughly 23.0% reported that 3rd Quarter 2020 was the firm’s most active quarter either in a combination or solely. 0.0% reported that 2nd Quarter 2020 was the firm’s most active quarter solely or in a combination in 2020.

Like most other sources of capital, the pandemic undoubtedly affected these lending sources as overall commercial lending and M&A activity came to halt in 2nd Quarter 2020.

Geography

97.0% of non-bank asset-based lenders reported that the majority of the firm’s credits were located in the United States, and 100.0% reported that it did not have any geographical restrictions within the United States when issuing loans. 3.0% of the conversational survey participants reported that the majority of the firm’s credits were located in Canada. While many traditional regional banks’ product offerings are restricted to their respective geographical markets, non-bank ABL finance companies see opportunity in their ability to issue credits across the United States, and International markets as well.

Often, companies run into issues with their existing bank lenders due to international financial components, in their business or have customers that have some exposure to a “sin industry”. Sin industries can include alcohol, firearms, tobacco, cannabis, gaming, and other industries that are not widely accepted, due to political, religious, or conventional beliefs. Many non-bank ABL finance companies see opportunity in these instances, understand that the nature of many companies need these components to survive, and offer flexibility for their clientele that contain these components.

Industry Focus

Through the conversational survey, Rush Street Capital was able to conclude that most non-bank asset-based lending finance companies are industry agnostic to some degree, and have a heavy concentration on Manufacturing, Distribution, Retail, and Construction, likely due to the asset heavy nature of these types of companies’ balance sheets. Several firms noted their internal mandates avoid credits issued to industries, such as Transportation, Construction, Engineering, Architecture, Oil & Gas, and Subcontractors due to heavy cyclicality or the “Pay when Paid” nature of the company’s invoicing. 1 firm noted that the majority of the firm’s credits are issued to consumer products or consumer services companies. 1 firm noted that majority of its credits were Healthcare related. Other firms noted that IT, Tech-enabled services, and E-commerce make up a sizable percentage of their portfolios.

To stay competitive amongst potential and current clientele, non-bank ABL financing sources have historically operated in a multitude of different industries. Given that asset-based loans are secured by a company’s assets, industries such as manufacturing have historically seen the most activity and interest in the non-bank ABL asset class. Recently, as “nonbankable” technology, tech-enabled, SaaS, and e-commerce companies have become more prevalent, non-bank ABL have offered products to these by lending on the Company’s intellectual property, proprietary technology, and recurring revenue streams, thus offering alternative lending options to these industries as well.

Use of Proceeds

      Nearly 100.0% of non-bank asset-based lenders noted that loan proceeds are most often used to extinguish existing company debt and/or for general growth and working capital purposes for companies who are under-capitalized or have encountered issues related to financial performance or liquidity. Other uses of proceeds noted were for to finance acquisitions and for shareholder dividends.

Companies utilize proceeds from non-bank ABL financing sources in a variety of ways, most notably, to pay off their existing traditional bank lender or mezzanine lender through a refinance or recapitalization. Additionally, they have tailored to the needs of their clientele by offering product and services for acquisition financing for leveraged buyouts and management buyouts, as well as for shareholder distributions, or dividend recapitalizations, and for general growth-oriented initiatives that companies seek to undertake. The expansion of their product offerings further adds to the flexibility of these firms and allow for legitimate sources of capital outside of a bank and other traditional lending sources.

Asset Class Focus

      Non-bank asset-based lenders’ asset class focus varied widely amongst firms. 18.0% of firms focus exclusively on one product offering or lending on one asset, whether it be Factoring, Purchase Order Financing, Accounts Receivable, Inventory, Machinery & Equipment, Real Estate, Intellectual Property, or “Other” asset. Any of these single asset firms tend to partner with other non-ABL shops in on opportunities that may call for lending on other assets outside of their focus, creating a syndicate.  80.0% of firms lend on one or more of these assets. Some stated that they “lead” with one asset and have a sublimit amount on others. When a company exceeds a certain sublimit, firms often seek out a partner with a focus on whichever asset that is to create a lending syndicate.

2021 Outlook

            We were able to conclude that non-bank asset-based lending finance companies are quite bullish on demand for their products in 2021. As US and International businesses felt the effects of the coronavirus in 2020, it was widely expected that the number of debt restructures would increase drastically in the 3rd Quarter 2020 and 4th Quarter 2020. However, due to the previously mentioned federal stimulus money and moratoriums implemented by federal and state governments, that thought never came to fruition in 2020. Nearly 90.0% of these firms predicted that product offerings will be in higher demand than 2020, due to lessening federal intervention and retightening oversight from commercial banks that was seen prior the pandemic. Roughly 10.0% of firms predicted that demand for firm product offering will not be experienced until 2022 or beyond. 100.0% of firms believe that demand for non-bank asset-based lending will increase drastically by the end of 2022. Many firms have taken measures, such as hiring additional salespeople, to handle the expected influx of opportunity.