Something has shifted in the middle market. The companies that once approached lenders with a straightforward refinancing request are increasingly achieving a more impactful arrangement than either party expected, and often a better one.

Hybrid lending, broadly defined as structures that combine an asset-based revolving facility with a term loan against fixed assets, real estate, or intellectual property, has been around in various forms for years. What is new is the urgency behind it. Compressed EBITDA at borrowing companies, a crowded direct lending market, and the practical reality that asset-heavy companies often have more value locked in their balance sheets than a cash flow loan can reach, all work in tandem to make hybrid structures a much more commonplace conversation for middle-market borrowers.

“You’ve got companies that are coming out of a bank structure that need significant flexibility and more liquidity,” said Kevin Cox, Head of Capital Markets at White Oak Commercial Finance. “There’s only so much liquidity you can structure in an ABL, or only so much you can structure in a term loan. Putting those together does seem to be the direction a lot of companies are going.”

Unlocking What a Single Structure Cannot Reach 

The arithmetic behind hybrid lending is straightforward, even when the structures are not. A company with $20 million in EBITDA might qualify for a $100 million cash flow term loan under a traditional lending arrangement. But if that same company has substantial receivables, inventory, machinery, and real estate, an asset-based structure layered with a term component could enable $150 million or more in total availability. The difference matters, particularly when EBITDA is under pressure.

Andy McGhee, CEO and founder of Archway Capital, finds that hybrid deal structures can make a major difference in outcomes in middle-market companies that have a stronger borrowing position than traditional lending might achieve. “We get in and look at some good, solid operating companies that just have a capital structure that doesn’t make sense for the business anymore,” McGhee said. “There’s nothing that the management team did to put the company in a tough position. The capital structure was built for a much lower interest rate environment.”

Asset-heavy companies, like industrial manufacturers, are becoming a regular participant in hybrid lending solutions. Near-term EBITDA pressure, from inflation, tariffs and geopolitical disruptions, reduce the amount of capacity to borrow from traditional cash flow facilities.

“But they still have good receivables, good inventory, machinery and equipment, and real estate,” Cox said. “By levering the assets rather than just the EBITDA, they can get more availability and probably better pricing than if they were just going for a highly levered cash flow loan.”

A recent White Oak transaction shows the arithmetic in action. In April 2026, White Oak Commercial Finance provided a $65 million asset-based revolving credit facility to a vertically integrated plastic consumer products manufacturer, alongside a $150 million term loan from a leading private credit firm. The combined facility supported a full recapitalization, refinancing the company’s existing revolver and certain finance lease obligations while funding continued growth, and made significantly more total capital available than either structure could have provided on its own.

The practical advantages for borrowers extend beyond raw availability. One of the most compelling features of a well-structured hybrid deal is administrative simplicity. When a lender can consolidate a working capital revolver and a term loan into a single credit agreement, with one set of covenants and one reporting relationship, the operational benefit to the borrower is significant.

“Finding a lender who can meld those two together in one structure means you have one credit agreement, one set of covenants, one person you’re reporting to,” Cox said. “That is much more advantageous for a borrower than having multiple parties to report to with two different sets of covenants.”

What Banks Are Doing About It

For bank lenders, the picture is more complicated but equally advantageous to borrowers. The same hybrid structures that non-bank lenders can assemble in-house often require a bank to find a partner, and the mechanics of that partnership have to be worked out carefully.

Mark Cuccinello, head of Structured Credit at Truist, oversees asset-based lending, working capital solutions, and equipment finance. He describes a market in which banks are under competitive pressure to do things that have historically been outside their comfort zone. Private credit lenders willing to offer more flexibility at slightly higher rates have changed the terms of competition. 

“Recently we’ve been compared to direct lenders providing ABL-type structures that have been historically difficult to get done by banks themselves,” Cuccinello said. “That certainly creates a strategic need for the rest of the market to be creative while also operating within the regulatory environment.”

Cuccinello sees split-lien partnerships between banks and direct term lenders gaining traction, with closer relationships needing to be established between the two sides. In the standard structure, the asset-based lender holds a first lien on accounts receivable and inventory while the term lender takes the fixed assets and intangibles, ideally using a base intercreditor template. In some variations, the working capital provider holds a first lien on all assets with the term lender in a second lien position.

For Steve Macko, managing director and head of Overland Originations at Wells Fargo, that evolution has fundamentally recast the role of the ABL lender. “Over my career, ABL has evolved into one of the most mainstream forms of capital for middle market borrowers,” Macko said. “The ABL lender is not the lender of last resort and no longer just providing working capital. They are strategic advisors who are helping design and arrange the full capital stack.” 

Closer Partnerships, Fewer of Them

The market appears to be moving toward more intentional, durable relationships between ABL providers and term lenders. Rather than assembling a different set of partners on each transaction, lenders are beginning to establish standing relationships that make the next hybrid deal easier to close.

“I think we’ll be seeing a lot more split lien hybrid structures as banks look to build more formal partnerships with direct term lenders, so that banks can increase their connectivity, activity and be more competitive,” Cuccinello said. “More finite, smaller lists of partnerships, rather than reinventing the intercreditor wheel on every deal.”

That change has implications for how private credit firms and bank lenders position themselves relative to each other. The competition that defined the last several years is not disappearing, but the nature of it is changing.

The March 2025 MaxiTransfers transaction offers a concrete illustration of how that model works in practice. Overland Advantage led a $74 million second-lien credit facility for the money services company’s recapitalization, while Wells Fargo continued as agent and lead lender on a $90 million revolving credit facility, bringing the total package to $164 million. Together, the bank and private credit firm did what neither could have done as well alone.

Macko points to communication infrastructure as the unglamorous but essential ingredient that makes those partnerships work. “The root cause of friction is usually poor communication,” he said. “Whether it’s during our weekly pipeline meetings, senior leader check-ins, or joint client calls, we spend a lot of time making sure we are being great communicators, and that ultimately leads to a better client experience.”

What Drives the Decision

On the borrower side, the motivations for seeking out a hybrid structure have multiplied. Macroeconomic pressure, including tariffs, supply chain disruption, and softening consumer demand, has put near-term EBITDA at risk for a wide range of companies. Sponsors are using hybrid structures to reduce the equity required in acquisitions, to execute dividend recapitalizations on existing portfolio companies, and to refinance facilities that no longer provide sufficient flexibility.

McGhee, who has worked through multiple credit cycles, sees the challenges in this moment. “Coming into this cycle, you had rising interest rates — that was one factor impacting everybody,” he said. “Then you had significant inflation, so operating costs from a personnel standpoint went through the roof. Then tariffs hit on top of that. Now raw material costs are way more than expected. You’ve got four things coming to bear on a management team simultaneously.”

Cox also points to client retention as an underappreciated driver. Companies with strong asset bases that are performing well, but could qualify to return to a traditional bank structure, are staying with their non-bank lender when that lender can demonstrate more availability or more flexibility than the bank alternative.

“If you’ve got an existing portfolio client that needs something, finding a way to keep that client is something we’re also seeing on the portfolio side,” Cox said. “Having to stretch a bit for good clients that are performing well, that could go back to a bank.”

Tanner Phifer, senior managing director and head of Origination at SLR Credit Solutions, whose firm operates across first lien, uni-tranche, FILO, and split lien structures, sees that retention dynamic playing out in how deals are won and lost.

“In the ABL middle market, pricing and structure typically converge across a small group of credible lenders. When pricing and structure differences are marginal, competitive advantage shifts to the intangibles: long-standing relationships with investment bankers, sponsors, and management teams; a reputation for creative solutions in complex situations; and deep sector-specific expertise such as retail,” Phifer said.

“In the middle-market cash flow space, there are probably 50 firms capable of writing a $150 million or $300 million check. In ABL, you’re typically competing against fewer than 10. That fundamentally changes the competitive dynamic. What separates firms is their ability to navigate complexity—whether it’s a turnaround, restructuring, or another special situation. Advisors and sponsors may cast a wide net to maximize terms, but they ultimately place transactions with lenders who have demonstrated the judgment to solve problems during diligence, the commercial mindset to find pragmatic solutions, and the experience to deliver certainty of close.”

What Comes Next

The lenders best positioned for the next phase of middle-market deal-making will likely be those who have done the work to standardize their intercreditor arrangements and build durable partner relationships before the next transaction arrives. The market for hybrid structures is growing, but the deals are not getting simpler.

For McGhee, the most important message is one directed not at lenders but at the borrowers themselves. “For the middle market specifically, they need to know that there are more solutions out there to fix their capital structure than there have ever been,” he said. “They have an opportunity to take their operating company, fix the capital structure, and get on with the business of running their company, instead of worrying about what their lenders are thinking and how many different covenant packages they might have.”

“Being a lender who can be creative, be flexible, and innovate with ideas, and not just stick to the same term sheet every day,” Cox said. “That is where we’re seeing success.”

The middle-market companies that need these structures are not waiting for the market to settle. The lenders willing to meet them with a full toolkit will win the business.