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its accounts receivable and inventory in order to prove that the outstanding loan balance is continuously less than or equal to the stipulated percentage of the borrowing base. If the loan balance exceeds this amount, then in asset-based lending lingo the loan is "out of formula." The borrower's failure to promptly restore the loan to formula is ordinarily an event of default under the loan agreement.

Asset-based lenders also made term loans to borrowers based on the value of the borrower's equipment and real property, but these are supplemental to the main revolving credit loan based on the borrower's more liquid accounts receivable and inventory.

As the 1980s wore on, suitable many asset-based lenders merged or were purchased by banks or other large financial institutions. This usually decreased their cost of capital while increasing its quantity, thereby enabling them to compete more aggressively with both other asset based lenders and banks. By the mid-1990s, both banks and asset based lenders competed against each other to make the same kinds of loans to the same kinds of borrowers. These borrowers were grouped together broadly as the "middle market," a term that rivaled "synergy" for the honor of Most Overused Term in Finance.

The term "middle market" means different things in different contexts. When Wall Street investment banks refer to a company as "middle market," they mean a company that is publicly traded and has a market capitalization of at least several hundred million dollars. When asset-based lenders in Chicago refer to a company as "middle market," they mean a company several orders of magnitude smaller than the smallest deal known on Wall Street. Generally, the only way that owners of a Chicago middle market company would see one hundred million dollars would be to tour the Bureau of Engraving and Printing. For Chicago commercial finance companies in the 1980s, middle market meant a deal anywhere north of $2 million but south (and usually far south) of $30 million. The scent of a credit larger than that would draw the banks. A $30 million asset-based loan usually indicated that the borrower was undergoing the lending equivalent of a Betty Ford Clinic rehab. The continual, highly detailed reporting required under an asset-based lending regime imposed the financial version of tough love: a fiscal discipline necessary to correct lax management practices.

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