Asset-Backed Finance and Its Risks For Suppliers and Customers

Asset-backed finance (“ABF”) is expanding rapidly as companies look for liquidity and private credit funds look for yield. Instead of lending against a company’s overall performance, ABF loans are secured by specific assets—most often receivables, inventory, equipment, or other identifiable income streams. The market is already over $6 trillion and is projected to reach $9 trillion within a few years.

For many businesses, ABF is a practical way to access capital when traditional bank lending is limited. But the speed and scale of the market’s growth have created problems. In some cases, lenders have accepted collateral that is difficult to verify or have relied on diligence that didn’t keep up with the pace of deployment.

Where ABF Creates Risk

Recent bankruptcy cases, including First Brands, show what can happen when ABF structures break down. Disputes arose over whether the same receivables were pledged to multiple lenders—an issue that becomes more likely when many parties are competing to lend quickly.

Problems like this happen for a few common reasons:

• Uncertain collateral values, especially receivables and inventory
• Multiple lenders claiming priority over the same assets
• Liquidity traps, where key assets are fully encumbered
• Limited monitoring, because deals were done too quickly

When these issues surface, they can push a company into distress suddenly, even if its operations appear stable.

Impact on Suppliers and Customers

A counterparty’s financing structure affects your risk as either a customer or supplier. If receivables, inventory, and equipment are heavily pledged, there may be little cushion for trade creditors if the business falters.

This makes it important to understand:

• How much of a company’s assets are pledged
• Whether receivables are factored or used as borrowing-base collateral
• Whether multiple secured lenders are involved

With commercial Chapter 11 filings up sharply year over year, having this visibility is increasingly important.

A few steps counterparties can take to protect themselves include:

• Review UCC filings for extensive collateral pledges
• Ask direct questions during credit reviews about financing arrangements
• Adjust payment terms when warning signs appear
• Monitor financial statements for tightening cash flow

These steps help avoid being caught off-guard if a customer or supplier becomes stressed.

Conclusion

Projections suggest that ABF will continue to grow. For businesses that sell to or rely on ABF-financed companies, understanding how those companies borrow is an important part of managing credit risk.