The landscape of corporate lending in the United States is dynamic, characterized by a diverse array of borrowers spanning various industries and a multitude of loan products and lenders vying for business. In recent years, economic fluctuations and shifting market dynamics have significantly influenced lending trends, impacting both borrowers and lenders alike. As we look ahead to 2024, it is essential to analyze current trends and anticipate future developments in the corporate lending landscape.

Factors such as rising interest rates, higher inflation, geopolitical uncertainty, and fears of recession contributed to a continued, significant decline in the leveraged loan market from its record high in 2021. Small and mid-sized businesses, particularly those in manufacturing, logistics, staffing, and service industries, found it increasingly difficult to secure loans to fund essential operations and growth initiatives. Despite the critical need for financing during economic downturns, many traditional banks prioritize safeguarding their institutions’ financial health, leading to reduced lending activity.

While, traditional banks typically assess a borrower's historical cash flow and profitability when making lending decisions, many institutions, in response to economic uncertainty and changing market conditions, reevaluated their loan portfolios and imposed stricter lending criteria. Additionally, banks with significant exposure to commercial real estate have reassessed their portfolios to mitigate risks, nudging businesses toward alternative financing avenues. This shift has forced smaller clients to explore alternative financing options, such as secured financing and working capital solutions.

Secured financing and working capital financing is also often slower than traditional lending to be impacted by macroeconomics. In 2022, secured financing volume was nearly $4.9 trillion in the U.S., according to SFNet’s 2023 Market Sizing Study. In our industry, a company’s assets are the main determinant for alternative funders’ lending decisions, over economic and other factors. This can have a big impact on availability of funds during an economic slowdown. Access to alternative financing, private equity funding, venture capital, and lines of credit are typically based on accounts receivable, asset-based lending or leasing.

In 2023, a turbulent economy and tightening credit environment caused many companies to look beyond conventional bank financing to meet business growth and working capital needs.  When Silicon Valley Bank, a lender to many start-ups, and Signature Bank, went under in Spring of 2023, it sent a shudder through the industry.  Secured financing and working capital providers worked hard to support customers (as just one example, we underwrote and funded a new working capital loan for a $20 million technology services company, to avoid disrupting critical cash flow and provide additional availability on unbilled revenue, during the Silicon Valley Bank fallout. This creative solution provided liquidity above and beyond their existing facility). With over $4 trillion in volume, the secured finance industry is a force in the U.S. GDP.

Although we don’t have a crystal ball to predict what exactly will happen in 2024, we can make some educated guesses on the outlook for secured financing and working capital to help determine what might be best for borrowers and businesses in our industry. Below are a few thoughts about the year ahead.

• Portfolio Evaluations: Some traditional banks are undergoing reevaluations of their loan portfolios compositions and are imposing stricter minimum loan or line of credit (LOC) sizes as a result. This shift is forcing many smaller clients to seek out alternative, secured and working financing options. Often it may be simply that the bank has decided that the client no longer meets new size requirements, and businesses may be searching for a new lender and options as a result.
• Commercial Real Estate: Simultaneously, we are seeing that some banks, such as those that may have extensive Commercial Real Estate (CRE) exposure, reassessing their portfolios to mitigate potential risks, and businesses within the Commercial and Industrial (C&I) sector that trip one or more covenants are being nudged towards alternative financing.

• Regulatory Changes: Regulatory oversight is expected to increase in 2024, leading to a normalization of procedures within the lending industry. Smaller banks and financial institutions are tightening their credit criteria, creating opportunities for specialized secured financing and working capital companies to fill the gap.  As an example, we worked with a leader in machine vision technology and sports data analysis that had a traditional bank line of credit with restrictive lending structure limiting access to working capital. Additional credit availability to further support their growth objectives was offered by including inventory as part of the collateral mix.

• Resurgence in Mergers and Acquisitions: Mergers and acquisitions had flattened out over the past few years, but we anticipate they will increase in 2024. If they do, it is likely that leveraged buyouts or acquisitions, namely, the acquisition of another company using a significant amount of borrowed money from bonds or loans, will also increase to meet the costs of acquisitions. The loan for the acquisition is predicated on using collateral from both the assets of the company being acquired and the assets of the acquiring company.

As the corporate lending landscape continues to evolve, lenders must adapt to changing market dynamics and anticipate future trends to meet the needs of borrowers effectively. This includes the use of technology to create a more user friendly environment for the borrower and efficient portfolio monitoring.  Secured financing and working capital solutions will play a crucial role in supporting businesses through economic uncertainties, providing flexible and tailored financing options. By staying informed and proactive, lenders can navigate the complexities of corporate lending in the U.S. and position themselves as trusted partners for businesses seeking financial assistance.