As the financial landscape becomes increasingly intertwined, traditional risk assessment must evolve. Today’s new frontiers of risk are defined by external linkages and structural complexities that require moving beyond the ledger to account for geopolitical shifts and demographic currents.
THE RIPPLE EFFECT: SYSTEMIC AND INDIRECT RISKS
“Interconnected markets expose funders to systemic and indirect risks that aren’t always obvious,” says Joseph Spiegel, sales manager, CapFlow Funding Group. “For example, the financial health of one supplier, vendor or regional economy can ripple across portfolios, impacting cash flows and credit performance unexpectedly. Many in specialty finance focus on individual client risk, but emerging vulnerabilities lie in
networked dependencies, geopolitical shifts and regulatory divergence. Firms that fail to monitor these external linkages may be blindsided.
“At CapFlow, we integrate broader market intelligence into portfolio oversight, combining analytics with on-the-ground experience. Anticipating these ripple effects turns unseen exposure into actionable insight and allows us to safeguard growth in a rapidly evolving, interconnected environment.”
Firms that focus only on individual client risk may be “blindsided” by these external linkages. Mark Bohntinsky, global head of credit at Gordon Brothers, reinforces this, stating, “A shock in one geography or sector can ripple quickly across portfolios. That’s why global coordination and standardized processes and
procedures are essential.
COMPLEXITY RISK & STRUCTURAL VULNERABILITIES
Beyond geographic interconnectedness, the industry faces what Bohntinsky calls “complexity risk,” the “layering of new products, cross-border structures and evolving capital solutions without consistent, transparent frameworks.”
“The industry must focus not just on individual transactions, but on how interconnected exposures behave under stress,” Bohntinsky says. “At Gordon Brothers, we emphasize learning and extrapolating lessons across our platform.”
A specific example of this structural risk is found in the emergence of hybrid ABL/Private Credit structures. Paul E. Martin, chief investment officer at Legacy Corporate Lending, warns of a “distinct risk” of “double financing the realizable recovery value of a business.
“Traditional ABL makes advances against A/R, inventory, M&E and real estate,” Martin says. “The assumption used in these transactions is that, in a business failure resulting in a need to liquidate the assets, the haircuts applied to underlying asset values will be sufficient to retire the associated loans. When you overlay an enterprise value approach, one makes an assumption as to what the ongoing value of the cash flow produced by the business is worth over
time, and an additional accommodation is provided against that value. This is fine in a strong, performing credit where the ABL is providing true working capital financing and the enterprise solution is being provided for profitable growth ventures. However, as the market has become more competitive, we are seeing lenders apply this approach in the financing of turnaround credits where the enterprise value is being calculated based upon the market value of Intellectual property and other related revenue streams. The problem is that if the business fails in its turnaround plan, the excess financing is based upon a future cash flow that does not materialize. This approach could result in some outsized losses in what were thought to be traditional ABL structures.”
THE FALSE SECURITY OF AUTOMATION
As the industry turns to technology to manage these complexities, new vulnerabilities emerge within the data itself. Heidi Ames, SVP, managing director, team leader at SLR Business Credit, warns that collateral reporting can be manipulated to create a false sense of security.
“As the financial world becomes more interconnected, one emerging risk that may not receive enough attention is the potential for collateral reporting — particularly accounts receivable eligibility — to be manipulated in ways that create a false sense of security,” Ames says. “While reporting may appear compliant on the surface, underlying issues such as disputed invoices, extended payment arrangements, related-party transactions or aggressive eligibility classifications can mask weakening credit quality. This highlights the importance of going beyond reported numbers by strengthening verification practices, reviewing customer concentrations and closely analyzing payment trends and aging patterns. As systems become more automated and data-driven, maintaining disciplined oversight and independent validation of collateral will be critical to ensuring that what appears eligible and collectible truly supports the borrowing base.”
THE HUMAN ELEMENT: SUCCESSION & INTUITION
Perhaps the most overlooked new frontier of risk is demographic. Jeffrey Whaley, chief financial officer at Haversine Funding, identifies “knowledge transfer and succession” as a critical concern.
“The asset-based finance industry is not immune to the demographic currents affecting the broader economy,” Whaley says. “We are approaching an inflection point as the Baby Boomer generation moves into retirement. As younger generations step into leadership roles, there is a real risk of losing decades of accumulated expertise.
“I’m not referring to knowledge that is captured in a memo or process document or even simulated via agentic AI. The greater concern is the loss of intuition only gained through years of experience navigating the unexpected. The test ahead is to ensure that hard-earned intuition is deliberately passed to the next generation rather than departing the industry with those who built it.”
By combining rigorous verification with a focus on mentorship, firms can protect against these networked dependencies. Ultimately, the ability to anticipate these unseen exposures will safeguard the industry’s future
growth. •
Rita E. Garwood is editor in chief of ABF Journal.