As SMEs rethink funding, is asset-based lending still underused?

For many SMEs, the funding conversation has changed markedly over the past two years. Cost of capital, often the biggest consideration when it comes to funding, has taken somewhat of a back seat as SMEs contend with an increasingly unpredictable world. Instead, conversations have focused on resilience, flexibility and whether existing facilities are genuinely fit for a more uncertain trading environment.

High borrowing costs have forced management teams to look much more closely at how they fund working capital, investment and growth. At the same time, ongoing geopolitical instability continues to create pressures across supply chains, input costs and business confidence. 

Even where those pressures have not yet translated into immediate operational disruption, they are influencing decision-making. Businesses are thinking harder about liquidity, optionality and how quickly they can respond if conditions change. Against this backdrop, asset-based lending (ABL) is back in the spotlight as businesses look beyond more ‘traditional’ forms of capital.

Shifting opinions on asset-based lending

This focus on ABL is by no means new. Historically, many businesses saw ABL as something to consider only in specific situations – usually for refinancing, distress or turnaround. However, that perception has now shifted. More management teams understand that asset-based lending can be a strategic funding tool rather than a reactive one.

With increased economic volatility and the changeability of markets becoming the ‘new normal’ for businesses globally, ABL’s flexibility is even more prevalent. In an environment where margins can come under pressure quickly and forecasts can become outdated faster than expected, ABL, being inherently anchored in assets and liquidity rather than being driven solely by profit performance, offers a different kind of support. Facilities linked to the underlying strength of the balance sheet can therefore provide greater resilience. That can make it a more stable and practical option for businesses navigating volatility.

Despite the clear benefits, ABL is still a much underutilised funding option in many parts of the SME market. Despite changing perceptions and a clear demand for flexible capital, there remains a lack of understanding of the key benefits of ABL and what can actually be funded.

There are businesses that assume ABL is too niche, too complex or only appropriate when options are narrowing. In reality, the product has evolved significantly with lending solutions that are far more sophisticated and can be structured to support growth, acquisition activity, refinancing and transformation. We’re increasingly seeing this in our own conversations with businesses across the UK, where ABL is being used to drive growth while providing greater flexibility and capital efficiency.

How geopolitical pressures are impacting how SMEs access funding

Geopolitical pressures are also shaping this conversation in more subtle ways. Global trade has gone through a profound reset in recent years. While the disruption caused by Covid may feel more distant now, it permanently altered trade patterns, supply chains and assumptions around resilience. More recently, further shocks have added to this instability. Changes in trade policy, tariff uncertainty and the ongoing conflict in the Middle East have all contributed to a more fragile operating environment, particularly for businesses exposed to cross-border supply chains or fluctuating input costs.

All of this can create a much more complex trading environment for businesses, impacting performance and dampening lender appetite. This is particularly true of more ‘traditional’ lenders who typically take a more risk-averse approach. Given this, it’s reasonable to expect some mainstream lenders to continue moving parts of their exposure, particularly cashflow-led structures, towards more secured positions.

However, complexity is where ABL can work best. For businesses that may be struggling to secure finance, but have a strong asset base and clear vision for growth, ABL can help to unlock capital without the constraints levied through other lenders. We’re already seeing this across the M&A market, particularly in corporate carve-outs and distressed acquisition scenarios. This is where flexibility, speed and a clear understanding of the asset base can make all the difference and enable transactions to get over the line.

Recent transactions reflect the shift

The growing interest in asset-based lending is best understood through the types of businesses now using it. Our support for Promarine Finance is one example of how it’s increasingly being utilised in more complex scenarios.

As an independent lender operating in a specialist market, the team needed a funding partner that understood its model and the nuances of marine finance. A more bespoke, revolving facility was required, structured around Promarine’s specific needs and growth ambitions. This reflects a broader trend of businesses seeking funding partners that can go beyond credit models, understanding the complexities and nuances of their operations to provide the funding required to drive their businesses forward.

Likewise, our backing of Inspirit Capital’s acquisition of Watson Fuels shows how asset-based lending can power more complex strategic activity. Supporting a corporate carve-out from a Fortune 100 company, the transaction required pace, certainty and a facility tailored to the commercial realities of such a large transaction.

So, is asset-based lending gaining traction? Yes, undoubtedly. But is it as widely understood or as proactively considered by SMEs as it could be? Perhaps not. This suggests there is still more to be done to raise awareness and improve understanding of how ABL can support a broader range of funding needs.