New tariffs are quietly inflating inventory values while eroding real collateral strength, forcing asset-based lenders to rethink advance rates, appraisals, and risk in manufacturing credits.
The tariff regime that took effect in early 2025 — 25% on Mexican and Canadian imports, 20% on Chinese goods—is stress-testing a fundamental premise of asset-based lending: that collateral values provide downside protection when borrower cash flows deteriorate.
For ABL lenders with manufacturing exposure, the question isn’t whether tariffs will impact borrowing bases. The question is whether current advance rates and reserve structures adequately capture the risks of inventory that may be simultaneously more expensive and less liquid.
The Collateral Compression Dynamic
ABL facilities typically advance 80-85% against accounts receivable and 50% against inventory, with the borrowing base adjusting monthly as collateral levels fluctuate.¹ This structure has historically provided lenders with strong recovery prospects even in stressed scenarios—the asset coverage creates a cushion that cash flow lending lacks.
But tariff-driven inflation creates a paradoxical dynamic that challenges this model.
When import costs rise, inventory values on borrowing base certificates initially increase — since most BBCs tie to cost value. A manufacturer whose Chinese-sourced components now cost 20% more reports 20% higher inventory on its borrowing base, temporarily expanding borrowing capacity precisely when cash flow may be under pressure from margin compression.²
“An additional, critical dynamic for asset-based lenders to monitor is the inflationary impact of tariffs on borrowing bases,” Hilco Global warned in its April 2025 analysis. “Since most borrowing base certificates are tied to the cost value of inventory, the higher costs driven by tariffs will immediately increase the amount that retailers are eligible to borrow against until a new appraisal is completed.”³
This creates a timing mismatch that sophisticated lenders must navigate: cost-driven borrowing base expansion precedes the appraisal adjustments and demand impacts that ultimately determine collateral recovery value. Borrowers facing working capital pressure from tariff-driven cost increases may draw heavily against temporarily inflated borrowing bases — creating exposure that subsequent appraisals reveal as inadequately collateralized.
When appraisals catch up—or when demand softens due to price increases passed through to consumers—the math reverses. Liquidation values decline as inventory sits longer, advance rates get cut, and borrowing capacity contracts at the moment companies most need liquidity.
Field Evidence: What Lenders Are Seeing in 2025
The stress is not theoretical. ABF Journal reported in March 2025 that banks had begun capping advance rates at 75% on AR (down from 85%) and 50% on inventory (down from 60%) to buffer against dilution risks.⁴
These adjustments represent meaningful reductions in credit availability. A manufacturer with $10 million in receivables and $8 million in inventory previously had a borrowing base of approximately $12.5 million ($8.5M on AR plus $4M on inventory). Under revised advance rates, that same collateral supports approximately $10.5 million — a 16% reduction in available credit that forces either additional equity contribution or operational deleveraging.
The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) from January 2025 confirmed broader tightening, noting a 15% net tightening of credit standards for commercial and industrial loans, including ABLs, driven by economic uncertainty.⁵ Non-performing loans in bank ABL portfolios ticked up to 1.8% in Q4 2024 from 1.5% in Q3, with early 2025 trends suggesting further deterioration as tariff fallout hit borrowers.⁶
Inventory appraisals in Q1 2025 showed a 10% decline in liquidation values for commodities like steel and electronics, according to Secured Research estimates — reflecting both oversupply and tariff-induced demand softness.⁷ When forced liquidation values decline while cost values rise, advance rate compression becomes the only mechanism for maintaining appropriate collateral coverage.
Independent ABL providers responded by hiking pricing to SOFR + 400-500 bps (up from 350 bps in 2024) and shortening revolver tenors to 18-24 months to mitigate asset degradation risks.⁸ These terms reflect repricing of risk that tariff uncertainty creates — lenders demanding compensation for collateral volatility that previous market conditions didn’t present.
Recovery Following Q1 Turbulence
The Secured Finance Network’s Q2 2025 Asset-Based Lending Index showed confidence rebounding after turbulent Q1 conditions. Bank lenders’ confidence rose 7.4 points to 56.5, while non-bank lenders climbed 10.8 points to 63.3, entering positive territory.⁹
Lending commitments increased 1.1% for banks and 5.2% for non-banks, while new outstandings surged 6.5% for banks and 47.4% for non-banks.¹⁰ These figures suggest that after initial caution, ABL providers have recalibrated underwriting to account for tariff dynamics and resumed deployment.
“With tariffs causing market volatility and uncertainty, ABL provides liquidity in the face of changing inventory and equipment values, supplementing cash flow beyond traditional financing,” Mike Semanco, president and COO of Mitsubishi HC Capital America’s business finance division, noted. ABL’s flexibility — adapting borrowing capacity to actual asset values—makes it particularly suited to navigating tariff-driven uncertainty.¹¹
But that recovery came alongside tightened underwriting standards that reduced effective credit availability even as headline commitment numbers increased. The ABL market is open for business, but with more conservative terms than the competitive conditions of 2023-2024.
Which Sectors Face Greatest Exposure?
Not all manufacturing borrowers face equal tariff pressure. Companies with the following characteristics warrant heightened scrutiny:
High import content from tariffed countries: Borrowers sourcing significant product from China, Mexico, or Canada face direct cost increases that may or may not be passable to customers. A February 2025 NAM survey found 62% of small-to-mid-sized manufacturers expect revenue declines due to tariffs.¹²
Limited pass-through ability: Companies selling into competitive markets where customers have alternatives — whether domestic competitors, imports from non-tariffed countries, or substitute products — cannot simply raise prices to preserve margins. Commodity manufacturers, contract manufacturers, and companies selling to price-sensitive end markets face particular pressure.
Long inventory cycles: Manufacturers with slow-turning inventory face extended exposure to carrying costs on higher-priced goods. If demand softens before existing inventory sells through, obsolescence risk compounds tariff-driven cost increases.
Working capital intensity: Companies that require significant receivables and inventory investment to support operations face compounded pressure: tariffs increase working capital needs (higher inventory costs) while tighter ABL terms reduce available financing.
Customer concentration: Manufacturers dependent on major customers with bargaining power may face pressure to absorb tariff costs rather than pass them through. The negotiating dynamic with large retailers, automotive OEMs, or industrial customers often forces suppliers to absorb cost increases that smaller customers might accept.
Lender Response Strategies
Sophisticated ABL providers are adapting their approaches to tariff-exposed borrowers:
Increased appraisal frequency: For borrowers on watch lists or showing early stress signs, lenders are moving from annual to semi-annual or quarterly appraisals. More frequent valuation updates enable faster identification of collateral deterioration — and faster response through advance rate adjustments or reserve implementation.
“For healthier borrowers, maintaining the current appraisal cadence may suffice. However, for those on a lender’s watch list or showing early signs of distress, lenders should consider increasing appraisal frequency to semiannual or even quarterly,” Hilco advised.¹³
Enhanced collateral monitoring: Field exam scope is expanding to include specific assessment of tariff exposure by SKU, supplier geography, and cost structure. Understanding which inventory items face tariff pressure—and which remain unaffected — enables more granular advance rate structures.
Tighter ineligible definitions: Inventory items with tariff exposure exceeding defined thresholds may be classified as ineligible or subject to reduced advance rates. This approach targets risk reduction without penalizing entire borrowing bases for concentrated exposures.
Shorter facility tenors: Rather than committing to 3-5 year facilities, some lenders are offering 18-24 month terms with renewal options—preserving ability to reassess exposure as tariff policy evolves.
Margin ratchets tied to performance: Pricing structures that adjust based on borrower performance metrics (coverage ratios, turnover metrics, margin trends) create incentive alignment and automatic risk repricing if conditions deteriorate.
The Opportunity Side
Tariff disruption creates opportunities alongside challenges. For ABL lenders positioned to navigate complexity:
Increased demand for ABL: Companies facing cash flow pressure from tariff-driven cost increases need working capital financing. ABL’s asset-backed structure may be the only available option for borrowers whose cash flows no longer support cash flow lending standards. J.P. Morgan noted that ABL flexibility “can be particularly useful to companies experiencing… temporary cash flow volatility, such as a company uncertain about how tariffs might impact its business.”¹⁴
Refinancing opportunities: Companies currently financed through cash flow facilities may find covenant structures untenable as tariff impacts compress EBITDA. ABL refinancing provides runway to weather tariff disruption while maintaining liquidity.
Reshoring-driven growth: As companies shift supply chains to reduce tariff exposure, domestic manufacturers may see increased demand. Equipment financing and working capital support for reshoring investments represents growth opportunity for ABL providers.
Distressed and special situations: Some borrowers will fail to navigate tariff disruption successfully. ABL providers with workout capabilities can acquire assets or provide DIP financing for restructuring situations—often at attractive risk-adjusted returns relative to performing credits.
Long-Term Structural Implications
Operating in a tariff-influenced environment appears to be a long-term reality rather than a temporary disruption. This has implications for how ABL providers structure their businesses:
Sector expertise becomes more valuable: Understanding supply chain geography, competitive dynamics, and margin structures at the sector level enables better risk selection. Generalist ABL providers may find themselves adversely selected against by specialists who can more accurately price tariff-exposed credits.
Technology investment in monitoring: Real-time visibility into borrower inventory composition, supplier geography, and sales trends enables faster response to changing conditions. Platforms investing in technology-enabled monitoring gain advantages over those relying on periodic reporting.
Relationship banking matters: In uncertain environments, borrowers value lenders who will work constructively through challenges rather than seize on technicalities to reduce exposure. ABL providers with reputations for partnership through difficulty attract better borrowers and generate more sustainable franchises.
Ecosystem Implications
For ABL Lenders: Tariffs create both risk and opportunity. The risk is collateral degradation in exposed portfolios; the opportunity is increased demand from companies needing working capital solutions that cash flow lending cannot provide. Portfolio-level assessment of tariff exposure—by borrower, sector, and geography—enables strategic positioning. Consider whether your current advance rates and reserve structures adequately capture tariff-driven collateral risk, or whether adjustments are warranted before stress materializes.
For PE Sponsors: Portfolio company working capital may be under pressure from tariff-driven inventory cost increases. Ensure ABL facilities have adequate capacity to support operations through uncertainty. Where current lenders are tightening, consider whether alternative ABL providers might offer more flexibility. Work with operating partners to develop supply chain strategies that reduce tariff exposure over time.
For Investment Bankers: M&A transactions in manufacturing sectors require enhanced diligence on tariff exposure. Buyers will demand representations about supply chain geography and customer price adjustment mechanisms. Sellers should prepare detailed analyses of tariff impact and mitigation strategies. Transaction structures may need to account for tariff-driven working capital volatility through adjustment mechanisms or earnout structures.
For Legal Advisors: ABL documentation should address tariff scenarios explicitly. Borrowing base definitions, eligible inventory criteria, and material adverse change provisions all require review in light of tariff disruption. Work with clients to ensure documentation provides appropriate flexibility for constructive workout scenarios while protecting lender interests.
For Turnaround Advisors: Manufacturing companies unable to pass through tariff costs will require operational restructuring, supply chain reconfiguration, and potentially financial restructuring. Build sector expertise in tariff-exposed manufacturing segments where workout activity will concentrate. Early engagement—helping companies develop tariff mitigation strategies before crisis—generates better outcomes than post-default intervention.
Sources:
- 1 Eastern Bank Asset-Based Lending Team, “Asset-Based Lending (ABL): What It Is and How It Works,” January 14, 2025 https://www.easternbank.com/insights/asset-based-lending-what-it-and-how-it-works
- 2 ABF Journal, “Asset Quality Concerns Mount in Asset-Based Lending as Economic Headwinds Persist,” March 24, 2025 https://www.abfjournal.com/asset-quality-concerns-mount-in-asset-based-lending-as-economic-headwinds-persist/
- 3 Hilco Global, “The Impact of 2025 Tariffs on Asset-Based Lenders With Retail Exposure,” April 28, 2025 https://hilcoglobal.com/perspective/the-impact-of-2025-tariffs-on-asset-based-lenders-with-retail-exposure/
- 4 ABF Journal, March 2025, op. cit.
- 5 Ibid.
- 6 Ibid.
- 7 Ibid.
- 8 Ibid.
- 9 Equipment Finance News, “Equipment companies turn to ABL as markets stay tight,” September 30, 2025 https://equipmentfinancenews.com/news/lender-operations/equipment-companies-turn-to-abl-as-markets-stay-tight/
- 10 Ibid.
- 11 Ibid.
- 12 ABF Journal, March 2025, op. cit.
- 13 Hilco Global, op. cit.
- 14 J.P. Morgan, “Asset-Based Loans: How They Work for Businesses” https://www.jpmorgan.com/insights/banking/commercial-loans-and-lines-of-credit/asset-based-loans-how-they-work-for-businesses