How Credit Deterioration and Collateral Fraud Are Catching Lenders Off Guard
ABL in late 2025 is juggling two tail risks that can erase a year’s returns overnight:
- softening credit quality in the lower-mid market, and
- fraud hiding in borrower-supplied collateral files.
Moreover, the two risks are converging: when liquidity tightens, the incentive to “manage” receivables, inflows, and customer aging increases. At the same time, for many lenders the methods used to verify those numbers have not materially improved.
Here’s what lenders and industry observers are saying, and pragmatic steps to tighten-up on risk without slowing growth.
What the Industry Is Saying
Here’s a roundup of recent industry news and viewpoints to illustrate the current conversation:
Credit Quality
Jamie Dimon’s warning about the First Brands bankruptcy being the first of many “cockroaches”, amid mounting concerns about the resilience of lower income consumers.
Dan Wertman’s prediction of a “private credit winter” because of the more opaque and complex financing ecosystem that now dominates lending to the middle-market, involving banks, hedge funds, asset managers, and specialist non-bank lenders.
Fraud
Matt Levine’s article unpacking the spreadsheet-and-email approach most industry participants currently employ to get information on collateral.
The WSJ on the “string of alleged frauds” which has led to the creation of the Structured Finance Association’s Fraud Mitigation Task Force.
The Technology Solution: How to Address Both Risks Simultaneously
By using technology like Validis to extract data from their borrowers’ accounting packages, lenders can overcome both challenges at once:
Regular reviews of borrower financials flag early-warning signals of stress before it becomes a problem. If, as Elijah Kaplan of Gordon Brothers says, “banks seem to be holding on to borrowers for too long”, in this market environment even senior lenders have an imperative to monitor borrower financials more deeply on a regular basis. Those lower down the capital stack are even more vulnerable. They must go beyond simple covenant compliance.
At the same time as gathering borrower financials, lenders can also pull collateral data direct from the accounting platform, massively reducing the risk of willful fraud through misrepresenting receivables, accidental mistakes in the data used to calculate borrowing bases, and enabling automated investigations into individual customer’s payments histories.
As Jason Schumacher of Academia Business Capital says:
“More frequent, more accurate financial data from our counterparties is critical to our (or any) lending business. Sustainable lending growth requires monitoring credit quality and identifying fraudulent behavior quickly and efficiently.”
Case Study: How One Lender Caught a Million-Dollar Fraud Before It Was Too Late
Earlier this year, Validis helped a larger international lender identify a million-dollar fraud. The borrower was inflating its receivables book and month-end to increase the facility size. Just looking at the receivables there were some red flags: large numbers, posted at weekends, not by the normal bookkeeper. When this was compared to the general ledger and balance sheet it was clear the books weren’t balancing. The borrower was able to identify the fraud early and recover most of its capital.
What You Can Do Today to Protect Tomorrow’s Returns
Validis automatically pulls and standardizes borrower financials to help mitigate fraud and keep an eye on credit quality in real-time.
For more information on how to safeguard your capital and to discuss these trends further, feel free to reach out.
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