Stricter banking regulations are creating new opportunities for non-bank providers of asset-based lending services to small and mid-sized businesses, according to a new market commentary by Old Hill Partners. As regulators are forcing banks to bolster liquidity and capital levels to prevent a replay of the global financial crisis, their middle-market lending has dwindled. This presents an opportunity for non-bank providers of asset-based lending (ABL) solutions to provide loans to businesses in need of working capital.
“The tighter regulatory environment has resulted in less willingness on the part of traditional banks to lend to small and medium-sized businesses,” said John Howe, President of Old Hill Partners. “These businesses, which are critical to our continued economic growth and recovery, are no longer able to rely on financing from these channels, and are increasingly turning to companies like ours to supply short- to medium-term, structured, asset-based loans and an injection of working capital.”
The key for non-bank providers of ABL, the commentary concludes, is building in strong due diligence processes and thoroughly vetting the risk involved in each potential transaction, closely examining the borrower’s financial condition, management and the industry. Filtering deals to fit a well-defined set of characteristics will enable ABL providers to effectively balance risk and reward and capitalize on banks’ retreat from the middle market.
“Each institution will differ, but our sweet spot is transactions of $25 million or less with maturities two to four years out,” added Howe. “This allows us to pay annual coupons typically the higher of LIBOR plus a spread or a fixed-rate several hundred basis points above the market and helps protect against rising interest rates.”
Old Hill Partners Inc., headquartered in Darien, Connecticut, is an SEC-registered investment adviser with significant experience in all facets of asset-backed lending and alternative investment management. The firm offers customized lending products and services to small and middle-market clients and works closely with borrowers and partners to provide creative funding structures to support near- to mid-term growth initiatives. Founded by John C. Howe in 1996, Old Hill has funded approximately $600 million in asset-backed lending transactions.