While other corporate credit has slammed on the brakes, asset-backed lenders fill the gap to supply a robust flow of funds. The volume of outstanding asset-backed loans to companies has been growing through the end of last year, according to the Commercial Finance Association.
Asset-backed lending has seen familiar spikes in recent years when credit was tight, most rememberable was in 1979, a year of inflation and energy shocks, and 1984, when the S&L crisis started unraveling.
The dollar volumes in factoring, a particular form of asset-based lending performed by Lily Pad Financial, 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.