Mid-Year Check-In: The State of Specialty Finance

As we reach the midpoint of 2025, the specialty finance space continues to feel like a battlefield—an observation we made earlier this year in our “From Groundhog Day to Gladiator” piece, and one that remains truer than ever. This market is not for the faint of heart. Deal volumes that dropped off at the start of the year have now returned with a vengeance. For ABLs and factors, activity is certainly up, but the satisfaction of closing deals at a higher rate remains elusive. There’s no shortage of work, but productivity is in question as underwriting and closing processes drag on. We’re watching closely to see how all this activity plays out through the rest of 2025.

While transportation appears to be stabilizing—a trend we’re beginning to observe—other sectors are grinding to a halt under the weight of tariffs, rising rates, and evolving borrower behavior. Across the market, there’s a definite stop-and-go feel; patterns are hard to pin down, and unpredictability reigns. We’re seeing more “stretch” deals: tighter cash flows, collateral shortfalls, and inflated pro forma expectations. Factors and lenders are placing increased reliance on field exams, appraisals, and liquidation estimates to maintain confidence in their portfolios.

Lenders now seem to be following one of two strategies. Some are sticking to established processes, resisting the urge to pursue riskier deals, and focusing on fortifying both process and portfolio while they watch the market. Others are pressing into more challenging territory, seeking new opportunities but simultaneously investing in internal operations and account monitoring to manage greater portfolio size and complexity. Across the board, credit shops are searching for underwriters and account executives to field growth and manage an expected rise in watch list or delinquent accounts.

A few trends are emerging halfway through 2025:

• Underwriting and closing timeframes are getting longer

• Portfolio deterioration is becoming more common

• Deal and collateral scrutiny—especially inventory—is increasing

• Field exams and appraisals are more frequent

• Bankruptcies, especially Chapter 7s, are rising

• Transportation fraud is on the uptick

• Almost every deal is drawing multiple term sheets—competition is fierce

On the capital side, banks remain in the game, but their stances vary widely. Some stand ready to support platforms and extend leverage, while others are tightening covenants and demanding more equity backing. Investors see opportunity in a fragmented lower middle market, but many prefer to deploy $50–100MM tranches—an awkward fit for most non-bank lenders. This mismatch continues to drive the need for creative structures and joint ventures. M&A activity hasn’t stopped, but there are visible clouds on the horizon as acquisition appetite may diminish with any slip in credit quality or deal performance.

Where does that leave us? For most factors and lenders, pulling back just isn’t an option. The smart play now is to get sharper—refining target sectors, lowering concentrations, diversifying portfolios, tightening structures, or bringing on more experienced workout and turnaround talent. There’s no universal playbook. Standing still might be an option, but it’s not the answer—not for those who want to win.

If your pipeline is inconsistent, your deals are taking longer, or your term sheets are lost among many, you’re in good company. The challenges don’t mean there’s no way forward—just that the path is steeper and narrower, with tough patches and occasional opportunities along the way. That’s part of the adventure!

The battlefield is the same, but the terrain keeps changing. Like the best gladiators—or, as our CFO Jeff Whaley likes to quote Napoleon, “The battlefield is a scene of constant chaos. The winner will be the one who controls that chaos, both his own and the enemy’s.” Those with sharp instincts, clear vision, and agile teams will be best equipped to control the chaos and succeed. These are interesting times, and we’ll keep navigating them—together.

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