In 2024, BCG calculated that the size of the small- and medium-sized business (SMB) funding gap was between $350 billion to $750 billion in the United States alone. Dry powder in private credit is on the increase, with around 20% of assets under management ready to be deployed, prompting asset managers to seek out further opportunities for yield and balance sheet deployment.

In a recent “Alternatives Watch” article, we talked about how as direct lending gathers more default risk, the asset-based financing (ABF) is a lucrative opportunity to diversify with a more liquid form of lending that uses a company's assets as collateral. ABF includes asset classes like large consumer pools of loans, residential loans, accounts receivable and trade financing, SRTs, NPLs, litigation finance, and commercial pools of loans—which include SMB lending.

Right now, SMB leaders are feeling the heat of the current economic volatility and need capital to support cash flow and invest in inventory. With credit tightening, ABF is quickly becoming a go-to solution for entrepreneurs looking to sustain growth without giving up equity. The underlying hard-asset collateral, together with the floating-rate nature of most ABF assets, may provide resilience against volatility for private wealth, private credit, and insurance LPs. Let’s outline some of the benefits and challenges of ABF strategies for private market managers, and the particular nuances of SMB lending asset securitization.

Why ABF is attracting private credit allocations

Managers seeking to increase allocations to private credit are flocking toward ABF as stubborn inflation and elevated rates make duration-hedged ABF loans appealing. The current atmosphere of widespread asset mispricing in the financial markets and the soaring long-duration Treasury bond yields make ABF another brick in investors’ fortification against uncertainty and volatility.ⁱ ABF offers a steady stream of interest payments, providing more stable income under the backdrop of market whiplashing. In economic downturns, traditional banks pull back their lending while private credit shops step in to extend credit to businesses. SIFMA reported that ABF trading was up 11.7% Y/Y in April, of which collateralized loan obligations (CLO) were the #1 subcategory.ⁱⁱ Total ABF trading in the first quarter 2025 was $108.9 billion, putting 2025 on pace ($430+ billion) to smash last year’s record $388 billion.

Growing SMB funding gap and ABF's rising relevance

In March, only 44% of SMBs reported having access to financing and working capital solutions, indicating they are “more inclined to use financing out of necessity rather than for strategic growth.”ⁱ More than 3,600 businesses in the U.S. were supported by private credit, as of 2023.ⁱⁱ Yet the SMB segment has been underserved because of legacy technology. The opportunity is growing as borrowers are attracted by the speed of execution, flexibility, and the tailored attention that banks cannot provide.

The fintech YouLend has funded 300,000 businesses worldwide. Another digital institution, TAB Bank provided nearly 300 companies with more than $57 million in funding in the fourth quarter of 2024, including $11 million for nearly 100 small businesses with lines of credit for growth. In December, non-bank lender Fora Financial announced a revolving credit facility closing, giving it $325 million of senior financing capacity, expanding its ability to provide access to capital for the SMB community. The SEC's new chairman Paul Atkins wants to expand investor access to private markets.ⁱⁱⁱ GPs see the opportunity in 10%–14% net IRR and steady fee income. The value of hard assets that collateralize many ABF structures also tends to rise with inflation. Further, the off selling of US Treasuries leaves a fixed income gap to fill.

Operations need to be surgical and automated for ABF success

Private markets funds that revel in complexity are the ones with the big upside. ABF provides access to new markets, enhanced with the availability of reliable and comprehensive data from multiple lending platforms like BlueVine, Lending Club, and SoFi. Every servicer has a different operating model, file formats, and methods of sharing data. The demands of mastering these loans, transaction lifecycle management, reconciliations, accounting and reporting, all within a daily NAV environment, are prohibitively onerous for manual workflows. SMB lending comes with its own set of risk management dilemmas, like more limited borrower and loan details, tracking borrower attributes and credit worthiness, and time series requirements to see how borrower health or loan health evolves.

A fund deploying ABL strategies that include pools of SMB loans can streamline investment decision-making and risk assessment through automated, portfolio-level policies and rules-based processing. This includes systematic classification of defaulted loans, continuous monitoring of FICO scores, borrower geographies, and loan product types—delivering granular, dynamic risk analytics and portfolio surveillance.

Single source of data for precise loan tape cracking

Managing performance across multiple lending platforms will flood systems with high volumes of disparate data from an array of alternative lending platforms, originators, and servicers, which could jeopardize a real-time view of portfolio health, if not properly consolidated. Securitized investments like ABF lack standardized elements and have dynamic terms and cash flows, making analyzing bid tape pricing and rates over time a challenging task. Many point solutions make it difficult for operations users to perform their tasks efficiently. This complex documentation and structure require GPs to invest in the necessary resources. For a firm’s operations to achieve surgical precision, a single, accurate source of data is the operating theater, in which consistent information can be accessed instantly by team members across the firm. It is the foundation for real-time performance tracking, position transparency, investor reporting, and precise fund valuation.

Managers need their data operating theater immaculate and well-lighted so they may slice and dice performance track records and drill down from the fund-level to investment level. Their systems should support the real-time generation of performance analytics including IRRs and multiples, TWRs, performance attribution, and contribution. The process of modeling instruments and “loan tape cracking” at scale using enormous amounts of unstructured and inconsistent loan data is particularly resource intensive when using spreadsheets and poor-quality data. For example, the creation of a security master poses an inherent data problem in modeling each individual loan at the granular borrower level, including loan type, industry, credit metrics, and more.

This demands efficient aggregation and precise extraction of data from those alternative lending platforms, sourced directly from the loan tape. Since the ABF business relies so heavily on information provided by lending platforms, it becomes essential for the deal team to analyze alternative datasets such as historical data to accurately gauge investment risk. This also enables them to assess the relative efficiency of different platforms.

Scalable tech infrastructure enables private credit managers to grow

GPs can grab a bigger share of the growing ABF market with modern middle- and back-office tech infrastructure to systematically capture, setup, track and reconcile millions of SMB loans.ⁱ Further, they need the ability to grow with scalable and flexible technology. Automated, cloud-based technology allows them to systemically capture and set up new loans, track loan level data, and monitor important metrics to manage the health of a client’s portfolio from the ground up.

Of course, large asset managers must manage numerous structures and strategies across asset classes. They must master loans across illiquid and tradeable books of business creating a single source of truth. Private market managers can grow without bursting at their technological seams, launching new investment strategies without strain and harmonizing the data to deliver a broad performance view across their multi-strategy private credit portfolios.

Key Takeaways:

Q: Why is asset-based financing gaining traction in private credit?

A: ABF offers floating-rate, collateral-backed structures that hedge against inflation and market volatility, making them attractive amid rising default risks in direct lending.

Q: What makes ABF especially relevant for SMB lending?

A: SMBs often face limited financing access. ABF enables quicker, flexible funding backed by real assets — essential for growth without diluting ownership.

Q: What operational demands does ABF introduce?

A: Executing ABF strategies requires precise data aggregation, automation, and real-time analytics across diverse, unstandardized loan pools and originators.

Q: How can private market managers scale ABF strategies effectively?

A: By adopting modern, cloud-based systems that automate loan lifecycle processes, maintain data integrity, and offer transparent, firm-wide performance tracking.

Q: What’s the role of modern data infrastructure in ABF risk monitoring?

A: It enhances dynamic surveillance by capturing borrower credit metrics, geographies, and real-time FICO shifts, improving risk-adjusted returns.

Arcesium related articles:

1. Alternatives Watch, https://www.alternativeswatch.com/2025/03/12/winning-the-race-to-the-asset-based-finance-abf-opportunity-arcesium-cesar-estrada/

2. https://www.arcesium.com/blog/mastering-performance-attribution-puzzle-private-credit-funds

3. https://www.arcesium.com/blog/organizing-securities-data-security-master

4. https://www.arcesium.com/resources/future-outlook-asset-based-finance

ⁱ JPMorgan. https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/tmt/threading-the-needle-where-markets-may-be-mispricing-trade-risk

ⁱⁱ SIFMA, US Asset Backed Securities Statistics. https://www.sifma.org/resources/research/statistics/us-asset-backed-securities-statistics/

ⁱⁱⁱ PYMNTS.com, “Study Finds Cash Flow Crisis Deepening for Small Businesses Amid Tariffs and Consumer Pullback,” https://www.pymnts.com/smbs/2025/study-finds-cash-flow-crisis-deepening-for-small-businesses-amid-tariffs-and-consumer-pullback/