Industry veteran Donald F. Clarke issues a blunt warning to the asset-based lending world: complacency kills, and only a return to disciplined fundamentals will prevent the next collapse.
The recent collapses of companies once thought stable like First Brands and PrimaLend should serve as a wake-up call to the asset-based lending community. They remind us that while Asset-Based Lending (ABL) has evolved into a mainstream financing tool, its survival still depends on discipline, transparency and intellectual honesty.
As I noted in a recent Bloomberg article, “Pay attention. Don’t fall asleep. You need financial statements from your borrowers now, tomorrow, every month.” The pace of modern lending can tempt even experienced professionals to prioritize speed over scrutiny. Yet, when that happens, the cracks widen and the system forgets what made it strong in the first place.
The fundamentals of ABL have not changed: understand how your borrower generates liquidity, know the true economics of the business and never assume that collateral value equals realizable value.
Historical Perspective: When Discipline Was Non-Negotiable
When I entered this industry in the 1980s, interest rates were high, margins were thin and survival depended on sound judgment. Lenders then did not have the luxury of complacency. Each deal demanded a thorough understanding of the borrower’s operations, cash flow and collateral.
Back then, ABL was not fashionable; it was functional. The work was gritty, rooted in field examinations, factory visits and long nights reconciling numbers by hand. But that rigor built the industry’s credibility. We learned from corporate collapses and accounting scandals that optimism never replaces verification.
Those lessons still apply. They built the very discipline that allowed ABL to move from a niche last-resort product to a respected pillar of commercial finance.
The Business Model Behind the Numbers
Too often today, lenders are impressed by the size of a borrower’s financial statements but fail to ask the most important question: How does this business truly generate liquidity?
Understanding a borrower’s business model, its margins, turnover cycles and dependence on vendor or customer behavior is not optional. It is central to assessing risk. When that analysis is replaced by surface-level ratios or reliance on unaudited assumptions, the results can be disastrous.
In the First Brands situation, the warning signs were not hidden; they were simply ignored. The company’s model didn’t support its debt load, vendor pressure was mounting and liquidity was drying up. Yet enthusiasm to put money to work eclipsed sound judgment. That dynamic, one I see all too often today, is the cost of complacency.
Then vs. Now: The Maturity and Dilution of ABL Discipline
The asset-based lending market has evolved dramatically since its early days. What began as a specialized niche dominated by non-bank lenders willing to take on perceived higher risks proved its value through disciplined underwriting and close collateral control. That success soon drew banks into the equation, and today, ABL is a robust, highly competitive space where both banks and non-banks play leading roles.
But with that growth has come dilution. In the race to win business, key safeguards have eroded. I have seen polished field exams that gloss over material issues, due diligence reduced to box-checking and borrowers presented as sound based on selective information.
When the focus shifts from credit integrity to deal velocity, the entire ecosystem becomes vulnerable. We end up financing illiquid assets, accepting collateral that cannot be realized and justifying risks that used to be deal-breakers.
The Ostrich Effect: Avoidance and Inaction
There is a phenomenon psychologists call the “Ostrich Effect,” where lenders, when confronted with early warning signs, prefer not to look too closely. Maybe the borrower has missed a covenant or delayed an audit, but the temptation is to rationalize rather than confront.
Inaction is expensive. Delayed field exams, postponed financial reviews or compartmentalized communication between credit, audit and management teams create blind spots. When those blind spots converge, even the strongest portfolios can deteriorate overnight.
An ABL culture that rewards volume over vigilance breeds this kind of risk. We cannot afford to bury our heads in the sand like the ostrich when the data speaks for itself.
The Postmortem: How Did We Get Here?
Each major failure tells a familiar story: too much confidence, too little verification. In many cases, lenders assume collateral or borrower stability that simply does not exist.
The pressure to compete to “get the deal done “has sometimes replaced the caution that defined ABL’s early years — institutional structures reward deployment of capital more than disciplined stewardship of it.
The First Brands case illustrated how this happens. When questions are not asked early, and anomalies are rationalized instead of examined, problems compound. As I told Bloomberg, “Until we get intellectually honest about the risks we face and the need for more robust due diligence, we are vulnerable.”
The Path Forward: Reinstating Discipline
To rebuild resilience, we must re-center ABL on its original foundation, understanding the business behind the balance sheet. That requires:
- Relentless Verification: Continuous financial reporting and trend analysis, not quarterly or annual surprises.
- Cross-Functional Collaboration: Credit, audit and portfolio teams communicating consistently.
- Early Warning Systems: Monitoring borrowing base trends, asset conversion cycle, vendor concentration and liquidity stress points.
- Education and Expertise: Re-emphasizing the analytical rigor of due diligence field examinations, not outsourcing judgment to automation.
- The Human Element: While AI is an emerging and robust tool available to ABL, human intelligence, “HI,” and the ability to discern the situation at hand, remain paramount to any sound operation.
At my firm, our guiding principle for nearly 40 years has been simple: never assume, always verify. That standard is what has kept lenders safe across economic cycles, borders and industries.
Conclusion: Back to Fundamentals
The First Brands collapse was not about a single borrower; it was about an industry drifting from its roots. Asset-based lending was built on realism, transparency and control. When those values erode, even sophisticated institutions are left exposed.
The path forward is not new; it is a return to what we already know. In lending, as in life, fundamentals never go out of style. As I often tell my clients, “If something looks, walks and quacks like a risk, it probably is one.” Don’t try to make it something it is not.
The cost of complacency is always higher than the cost of caution.
Donald F. Clarke is President of Asset Based Lending Consultants (ABLC), established in 1986 and recognized globally as the leader in field examinations and lender support services. Clarke is also the author of Asset-Based Lending Disciplines and a frequent industry speaker on credit risk management and collateral analysis. He can be contacted at d.clarke@ablc.net