Muted return expectations, increasing difficulty in sourcing traditional financing, and advancements in technology have paved the way for alternative financing options to become mainstream. Firms are hatching innovative private credit structures and vehicles to support funding demands and provide new fuel for investment.

Despite persistent inflationary pressures and global uncertainties, private credit has proven to be incredibly resilient, presenting higher yields in the face of higher-for-longer rates. Because of the strategy’s strength during periods of volatility, the market has seen an increase in the number of private debt funds. As competition and demand for greater product variety heats up, the private markets have seen a noticeable shift toward asset-based finance (ABF), a form of lending that uses a company's assets as collateral. Often referred to as asset-based lending (ABL), ABF strategies have grown to rival direct lending ($91 billion commitments) as the second most popular private credit strategy, drawing $45.69 billion in commitments in 2025.ⁱ It is not a stretch to imagine a private credit world in which ABF overtakes direct lending as the prime strategy.

As more institutional investors and firms explore ABF, it's crucial to understand the growth dynamics, key considerations, and operational impacts of this asset class.

Advantages and drawbacks of ABF

At its core, ABF and other specialty finance strategies enable borrowers to secure funding using assets such as receivables, inventory, or equipment as collateral. The appeal lies in its structured approach: Lenders evaluate the intrinsic value and liquidity of the underlying assets rather than relying solely on the borrower’s credit profile. This financing model offers a dual advantage: Borrowers gain access to capital while investors invest in a pool of loans backed by tangible assets. But like any allocation, investing in ABF requires thorough due diligence so that investors understand both the advantages and obstacles:

Improved access to capital

Requirements for credit history and financial track record can prove to be a roadblock for many companies, especially startups and those in high-growth phases. ABF removes this barrier by focusing on asset valuations rather than a borrower's credit score. For their part, investors like the asset class because the loan is backed by tangible assets.

Investment diversification

The diversity and granularity of ABF strategies offer allocators new sources of uncorrelated return, downside protection, and a steady income stream. Types of ABF include loans secured by everything from inventory and intellectual property to pools of consumer or business loans. The asset class is also appealing because of its exposure to a variety of underlying assets covering sectors and geographies. This diversification helps reduce overall risk to any one particular asset class or company, giving lenders a more balanced investment strategy and opportunity to diversify their loan portfolios.

Protection from economic headwinds

Economic uncertainty can create pockets of market dislocation that occur when stressful conditions lead to large, widespread asset mispricing in the financial markets.ⁱⁱ Because alternative credit tends to be uncorrelated to market swings, investors can expect ABF to generate stable returns. What’s more, ABF is typically structured to deliver a consistent cash flow from its underlying assets.

Asset and collateral risk

Effective ABF reporting requires visibility far beyond the fund level; managers need to report and monitor risk at the individual borrower level. The borrower assumes a greater risk if the loan defaults as the lender can repose collateralized assets. Conversely, the value of the collateral or underlying assets can fluctuate, meaning that the lender may not recover the full amount in the event of a default.

ABF requires complex monitoring

Managing ABF products can be costly, time consuming, and complex because they require constant monitoring. Collateral valuations can also be resource-intensive and complicated due to the constant need to run borrowing base calculations.

Growth drivers of ABF

Pooled business loans and pooled consumer loans, which aggregate individual consumer loans into a single financial instrument, have gained significant traction in recent years. These loans offer investors a diversified portfolio of assets, reducing the risk associated with individual loans.

Market demand

The ability to secure funding quickly, with fewer conditions, has made ABF an increasingly popular financing choice for many mid-market companies and SMBs. This growing acceptance is expanding the pool of available assets and providing investors with a more liquid and tradable investment option.

Opportunity to mitigate risk

By using assets as collateral, lenders can mitigate their risk. If a borrower defaults, the lender can seize the related assets. ABF presents a potentially safer option for lenders, which can lead to more favorable terms for borrowers.