Capital & Clarity: Belts & Suspenders
How Lenders Think About Risk in Private Credit & ABL
Lenders want to finance working capital gaps, not margin problems.
I talk to a lot of credit players—from asset-based lenders (ABL) to merchant cash advance (MCA) firms to large institutions providing corporate debt. Underwriting guidelines have been pretty much the same for as long as I can remember. Risk tolerance, however, is dynamic. In the ZIRP era, cost of capital was cheap. If anything, lenders couldn’t lend fast enough…
Today, credit conditions have tightened. Risk tolerance has adjusted. Cost of capital has gone up.
Over the last few months, my team has worked with or supported more a dozen companies (that we do CFO Services for) in helping secure funding; mainly consumer and retail brands. Here’s my pulse on the street.
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Lenders Don’t Like Surprises
If a lender gives you money, they want to know—without a shadow of a doubt—that they’ll get it back.
The ZIRP era is over. The old playbook is gone. Lenders are back to fundamentals, risk mitigation, and collateral-backed decision-making.
Today, if you want to get financed, you need both a belt and suspenders.
Here’s what high-quality capital allocators in private credit and asset-based lending are looking for:
1. Profitability and Liquidity
Cash flow is paramount, and lenders don’t want to finance a company that’s one bad quarter away from trouble. If you’re not profitable, they want to see at least a year’s worth of cash runway—enough to ride out uncertainty without another capital raise.
Lenders—especially senior credit partners—want to minimize their risk.
There some exceptions here. Non-bank lenders will often have strong relationships with investors financing companies as preferred shareholders. Lenders can be flexible if they are expecting follow-on rounds that would shore up liquidity position of an otherwise, high growth and negative net margin businesses.
2. Balance Sheet Health: The Price of Admission
Lenders aren’t just looking at profitability—they’re laser-focused on liquidity and solvency.
Quick Ratio ≥ 1.0 → Ensures you have enough liquid assets to cover short-term liabilities. (Quick Ratio = (Cash & Cash Equivalents + A/R) ÷ Current Liabilities)
Current Ratio > 1.0 → A stronger current ratio signals financial health. (Current Ratio = Current Assets ÷ Current Liabilities)
Lenders benchmark these ratios across the market. If yours are weak, your credit options shrink.
💡 Tip: Ask your CFO to include balance sheet ratios in monthly reporting.
3. Collateral Matters
The easiest way to get a high-quality credit? Give lenders something they can grab.
Lenders want a strong borrowing base—meaning inventory (finished goods), receivables, or hard assets that can be collateralized. The easier it is for them to recover their money if things go sideways, the better your chances of securing credit.
Lenders are risk averse. They’re financing assets they can take possession of if needed. This is especially true in asset-based lending. They care about NOLV (Net Orderly Liquidation Value).
4. Profitability & EBITDA Quality
If your business is profitable, you’re ahead of the pack—but not all profits are created equal.
Lenders are scrutinizing EBITDA quality unlike before:
Recurring vs. One-Time Revenue: Lenders favor stable, predictable revenue streams. If your cash flow is volatile or heavily seasonal, expect higher scrutiny, or covenants in your credit agreements.
Gross Margins & Operating Leverage: Lenders want to see that incremental sales drive real cash flow, not just higher fixed costs.
Debt Service Coverage Ratio (DSCR): Most lenders want a DSCR > 1.25x—meaning your operating cash flow comfortably covers debt obligations. Anything below 1.0 is considered distressed. (DSCR = (Net Operating Income) ÷ (Principal + Interest)).
If your EBITDA isn’t “durable,” lenders will assume you’ll be back in a few months looking for more access to liquidity. That’s not a bet they want to take.
The Takeaway: Think Like a Lender
The days of loose underwriting are over. Several non-banking lenders have already gone belly up. If you want to secure high quality financing products, you need to approach your business the way a lender does.
Have liquidity. A strong cash runway buys credibility. The best time to get access to liquidity is when you have liquidity.
Strengthen your balance sheet. Weak ratios won’t cut it.
Have collateral. If lenders can’t recover their money, they won’t lend.
Prove EBITDA quality. Predictable cash flow gets priority financing.
Risk Tolerance
📌 Macro-dynamics drive credit conditions.
When Credit Conditions Are Loose (Easy Money)
Higher risk tolerance: Lenders extend more credit, lower advance rate thresholds, and relaxed covenants.
More competition: New entrants and non-bank lenders increase loan availability, driving down pricing.
Flexible structuring: Lenders may include more “stretch” availability, higher advance rates, and even some cash-flow lending components.
Faster approvals: Credit underwriting becomes more aggressive, relying more on borrower growth potential.
When Credit Conditions Tighten (Liquidity Crunch)
Lower risk tolerance: Advance rates drop, borrowing bases become more conservative, and lenders focus on liquidation values.
Tougher credit standards: Tighter covenants, stricter financial reporting, and increased due diligence.
Flight to quality: Lenders prefer stronger borrowers with higher-quality receivables and diversified customer bases.
Higher pricing & fees: Lenders demand wider spreads, higher upfront fees, and stronger—on occasion—personal guarantees.
Final Thought:
Lenders get a pat on the back for making a good loan. They can get fired for making a bad one. They’re not in the business of being “risk seeking.” Their products and business model—by design—is low risk.
It’s not the company with the flashiest growth story that gets funded; albeit there are financing products out there for this. It’s the one that can prove, in cold, hard numbers, that it won’t run out of cash.
Note: there are financing solutions available for non-ABL qualified companies. Notably, venture debt products for VC backed companies that may not have the borrowing base qualified for an ABL (yet). Or MCA (who finance against expected revenue / cash receivables) products that are designed for a cohort of the market. These are—in their nature—very different than traditional ABLs and corporate debt solutions. I’ll explore these in depth in the future.
Another note: Ideas expressed here are thought starters. There’s a full strategy and structure that’s required to put a credit pack together to ensure the right financing solutions are available for companies.
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What I am reading:
I am planning to attend Berkshire Hathaway’s Annual Shareholders Meeting in Omaha in May. Ahead of this event, I am working through every annual letter Buffet has written. Last week, I read his 2023 letter. This week I finished 2021 and 2022.
It’s so (so!) good.
