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What’s the difference between “Middle Market” and “ABL”?

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As any CFO can tell you, lenders can sometimes speak a different language when it comes to describing what differentiates their bank from others.  You have probably been subjected to hearing terms such as “commercial credit”, “business credit”, “business banking”, “middle market”, “C&I” or “ABL”.   All of these terms are shorthand for the types of loans a particular lender can offer.  

The challenge of understanding banker lingo is that different banks use different terms to mean the same thing.   For example, “business banking” and “small business lending” are almost always synonymous, but not necessarily the same as “business credit”.  

Segmentation is the name of the game

For most banks and finance companies with more than $1 billion in assets, commercial lending is typically segmented into Large Corporate, Middle Market, and Business Banking. The reason is that banking is (or at least was) a competitive business, and in order to compete effectively, most banks will designate loan officers to target potential borrowers based on some combination of loan size, industry, or geographic area.  Because the “Large Corporate” segment represents a relatively small group of potential borrowers (typically borrowers requiring in excess of $50 million of bank debt), the loan officers covering those companies tend to specialize by industry rather than geography.  “Business Banking” loan officers, with a focus on loans of $500,000 to $5 million, tend to focus more on a discreet geographic area, such as “Northern New England” or “Eastern Massachusetts”.

Middle Market vs. ABL

“Middle Market” is generally understood to describe a type of borrower, whereas “ABL” (asset based lending) refers to a type of loan.  A middle market borrower is generally a business with revenues of $25 million to $250 million that is profitable, with a healthy balance sheet that is light on debt.  To illustrate, I’ll use the example of Forestall & Co., a manufacturer of automotive components with $100 million of revenue, $15 million of EBITDA, and $20 million of total funded debt.  Forestall would be an attractive borrower, as the Company’s financial performance and relatively light debt load would give Forestall an excellent risk rating, and would require less aggressive oversight by the bank.  Instead of watching the borrower’s performance daily or monthly, the bank might instead ask for quarterly financial statements and put certain performance covenants in place to protect against an unexpected default.

If however Forestall was seeking to increase its total funded debt to $40 million, that would mean higher leverage and higher risk.  Most banks would no longer consider the borrower a candidate for a middle market loan, and would instead consider the company for an asset-based lending (ABL) facility.  An ABL facility generally means that the bank will offer a more formula-driven revolving line of credit, coupled with an increased level of bank oversight.  Instead of quarterly reports, the bank may want to review financials weekly, and may want to review all vendor payments in excess of a certain amount.  The ABL terms will generally include pre-determined advance rates against inventory and receivables, with the “availability” adjusted on a daily basis.