There has been almost endless stories about the collapse of the U.S. sub prime residential mortgage market to the point that you’d have had to have been sleeping under a rock over the last year to not know about it.
But what we don’t hear very much about is the sub prime market for business loans that is perhaps even more messed up on a global scale.
The sub prime market space exists between the corporate or A lender products and the asset based lending sources that finance on the bases on asset liquidation value.
This is a very important form of business finance and serves as a transition step between low risk and high risk.
At the present time, the business sub prime market has basically disappeared as the lenders involved in this market have either gone bankrupt from loan default or don’t have a viable source of capital themselves to carry on business with.
The result is that businesses are reluctantly moving to asset based loans to acquire incremental capital for their businesses.
This tends to be very costly business financing that will effectively drain the equity of a business, basically causing deflation in the process as any assets that are repossessed through default will be liquidated for a fraction of their potential value under non recessionary conditions.
But abl’s do provide capital and for many this will be a source of money for survival, not profitability.
The sub prime market will resurface at some point, but not until the economy gets back on track in the future.
