Corporate Finance in 2025: New Obstacles in Asset-Based-Lending Sector

Asset-based lending (ABL) has grown at a rapid clip in the wake of COVID-19, record high interest rates, and persistent inflation—particularly in the retail and consumer sector.

Total ABL commitments shot up by 9 percent in 2021 and 10 percent in 2022. Though the last two years saw more modest increases, ABL is here to stay: Analysts project the overall market to grow at a compound annual growth rate of ~16 percent to $1.65 trillion by 2030 on the back of rising demand for alternative financing, expansion into emerging markets, and streamlined asset valuations via digital platforms, among other factors.

But as the market picks up steam, lenders are becoming more stringent. They are taking a more proactive approach in reacting to troubled loans—be it by implementing more aggressive reserves, capturing unencumbered assets as part of amendments and debtor-in-possession loans, or engaging a financial advisor earlier in the process.

They are also exiting credits and/or simply not deploying capital to anything that shows signs of distress. And when possible, they’re pushing deals to private credit sooner than they may have in the past. Case in point: in 2024, the co-CEO of KKR said that asset-based finance had grown 40 percent year-over-year for his firm.

These changes could impact both ABL lenders and borrowers significantly in 2025. The rising cost of bankruptcy, for instance, could lead to an increase in minimum excess availability requirements above the standard 10 percent of commitment size. Meanwhile, market forces will continue to put pressure on effective loan appraisals, which in turn could lower Net Orderly Liquidation Values and constrict liquidity.

Finally, if the Trump administration follows through on higher import tariffs, companies that source a significant amount of product from Asia, Mexico, and other regions could see higher input costs. Should they not be able to shift their sourcing or pass higher costs onto consumers, lower profitability and tight liquidity will likely occur.

In the near term, both lenders and borrowers need to be hyper-focused on holiday sales numbers, the resilience of consumer spending, and impacts to collateral values and of updated appraisals. Longer term, lenders should keep a close eye on shrinkage—the difference between inventory recorded and actual physical inventory—and conduct more frequent field exams to help mitigate it. Lenders will also continue to manage risk through broad syndication, “first-in, last-out” (FILO) tranches, and other mechanisms like leveraging private credit and creative structures to refinance risky loans. Whether the private credit market moderates to more conservative lender terms or dampens its own risk appetite remains to be seen.