Economic Backdrop: Tariffs Cloud Growth Signals

The topline U.S. GDP figure of +3.3% growth in Q2 may seem robust, but deeper analysis reveals fragility beneath the surface. The bulk of growth was driven by a collapse in imports (following a tariff-driven surge in Q1), which mechanically boosts GDP in accounting terms. When stripping out volatile trade and inventory components, final sales to private domestic purchasers grew by just 1.9%, highlighting underlying demand weakness.

Real consumer spending growth has slowed to 2.1% Y/Y in July, down from 2.8% in July 2024. Meanwhile, the labor market—once the economy’s strongest pillar—has shown signs of strain. The U.S. added just 107,000 net jobs across the last four months, with gains concentrated in healthcare and social assistance. Inflation pressures persist, with core PCE inflation ticking up to 2.9% Y/Y in July, and trade-related price effects looming larger by the quarter.

As a result, the Federal Reserve faces a dual dilemma: rising inflation discourages rate cuts, while a weakening labor market encourages them. Market expectations suggest there’s an 80% chance of at least 75 basis points in cuts by year-end, with the first likely in September.

This disconnect between headline GDP and true economic momentum has led to a growing reliance on high-frequency indicators and alternate benchmarks to gauge actual business conditions. For ABL lenders, the tariff-induced distortions have created both caution and opportunity. Inventory-driven distortions in GDP mean borrowers may present strong Q2 revenue growth without the underlying margin health or forward visibility that lenders typically require.

The inflationary impact of tariffs is particularly acute for import-heavy sectors like retail, electronics, and industrial distribution—many of which rely heavily on ABL facilities. According to recent data from the Yale Budget Lab, core goods prices have risen nearly 2% above their pre-2025 trend, with as much as 80% of tariff costs being passed through to consumers in some sectors.

Commitments Rebound, Driven by New Client Activity

Amid this uncertain backdrop, ABL commitments and outstandings rose across both banks and non-banks in Q2.

Banks reported a 1.1% increase in total commitments and a 3.3% gain in outstandings. New commitments to new clients surged +58.7% quarter-over-quarter, while runoff dropped -14.5%, swinging net commitments from -$3.55 billion in Q1 to +$1.01 billion in Q2.

Non-banks posted an even stronger quarter, with +5.2% growth in commitments and +2.4% in outstandings. New commitments rose +45.3%, and runoff contracted a dramatic -64.4%, propelling net commitments from -$173 million in Q1 to +$679 million in Q2.

Utilization trends diverged: bank utilization rose slightly to 39.4%, just below its long-term average, while non-bank utilization dipped to 50.0%, though still above its multi-quarter trend.

This dramatic swing in net commitments marks one of the strongest quarterly recoveries in recent SFNet survey history.

Interestingly, average deal sizes for both new and existing clients have trended upward, indicating that lenders are more comfortable writing larger initial commitments. This may be the result of borrower demand to refinance existing term debt or build liquidity buffers amid economic uncertainty. It also reflects a competitive dynamic where lenders are offering more flexible structures, sometimes with incremental availability tranches or delayed draw features, to win mandates.

Portfolio Performance Stabilizes Across Lender Types

Portfolio health was largely stable in Q2, with mixed but improving indicators.

Banks saw a modest increase in write-offs (+11 bps) and non-accruals, with 36.4% of respondents noting a rise. However, criticized and classified loans fell by 9 bps, a positive sign that distressed loans are working through the system.

Non-banks reported flat write-offs, a rise in non-accruals, and increased criticized loans, though nearly two-thirds said their portfolios were unchanged.

In historical context, Q2 2025’s credit metrics remain well within norms—indicating no broad-based credit deterioration despite macro strain. Instead, lenders appear to be managing through elevated volatility with discipline.

Portfolio performance, while mixed on the surface, is holding up better than many expected given the weakening macro signals. The decline in criticized and classified loans among banks suggests a normalization trend—where previously stressed borrowers have either cured or exited through portfolio cleanup efforts.

Lender Confidence Rises—Especially Among Non-Banks

The SFNet Lender Confidence Index showed encouraging signs of optimism:

Banks’ confidence score rose +7.4 points to 56.5, remaining in neutral territory. Non-banks’ score jumped +10.8 points to 63.3, entering positive territory and reflecting optimism across all five measured indices.

Non-bank lenders were especially upbeat on new business demand, scoring 79.2 compared to 67.4 for banks. They were also more bullish on utilization and headcount growth. In commentary, many lenders acknowledged ongoing caution due to tariffs and rates, but the overall tone shifted toward stabilization and opportunity.

Sentiment is always nuanced, but Q2 saw clear signs of lender conviction returning—especially among non-banks, who tend to be more agile and market-driven than traditional depositories. The survey’s five sentiment sub-indices—business conditions, demand, portfolio performance, utilization, and headcount—all improved among non-bank lenders, pointing to holistic confidence.

While only 17% of non-banks forecast improvement in general business conditions, over half expect new business demand to rise, and 42% plan to expand headcount. This willingness to staff up signals internal confidence in pipelines and deal activity heading into the fall. It also aligns with broader private credit trends, where non-bank platforms are gaining market share in both traditional and hybrid ABL structures.

Demand Environment: More Deals, Bigger Pipelines
Deal volume surged in Q2, especially for new clients:

Banks and non-banks both reported increased deal counts and average deal sizes for new clients, suggesting confidence in underwriting new relationships.

The rebound in new outstandings (+6.5% for banks; +47.4% for non-banks) and decline in runoff (-15.6% and -39.7%, respectively) reflects not just increased activity, but a renewal cycle that is unlocking upsized facilities, as companies revisit capital needs and prepare for extended macro uncertainty.

In interviews accompanying the survey, several lenders noted a growing trend of borrowers 'shopping their files' earlier and engaging in multi-lender dialogues to structure larger, more strategic facilities. This has opened the door for clubbed or co-agented deals to reemerge as a viable structure, especially among middle-market borrowers seeking tailored solutions.

Looking Ahead: Challenges Remain, But ABL is Well-Positioned

Though macro uncertainty persists, ABL lenders are entering the second half of 2025 with momentum. Facility growth, improving sentiment, and renewed interest from new borrowers suggest that the industry’s core value proposition—flexible, collateral-based capital—remains in high demand.

Risks tied to tariffs, inflation, and Fed policy remain, but ABL appears to be on strong footing to meet evolving borrower needs, especially as refinancing demand rises and non-bank lending grows more competitive.

Looking forward, the consensus is that while Q3 and Q4 may see choppier economic conditions, ABL lenders are poised to play an outsized role in meeting liquidity needs. The industry's defensive nature—grounded in asset coverage, dynamic advance rates, and frequent monitoring—gives it durability in both rising and falling rate environments.

Moreover, the softening in the broader commercial and industrial loan (C&I) market, particularly among regional banks, may create further opportunities for ABL growth. Several lenders indicated they are actively tracking upcoming C&I maturities and stand ready to provide ABL take-outs for term-heavy borrowers facing refinancing pressure. If macro uncertainty persists, 2025 may yet prove to be a banner year for ABL deployment.