Asset-based lenders

Understand this lender type

An asset-based lender advances against a defined borrowing base, often built from receivables and inventory. It applies eligibility rules, advance rates, and reserves rather than lending the full accounting value of every asset. Some facilities also include equipment or other collateral, depending on the structure.

How to assess the fit

This route may fit a business with substantial operating assets and dependable reporting. Before approaching a lender, model availability using conservative eligibility assumptions. Show receivables aging, customer concentration, inventory turns, and the controls used to reconcile those records. Explain how sales growth changes both collateral and working-capital needs.

Questions that deserve an answer

Borrowing capacity can shrink when invoices age or inventory becomes less saleable. The most dangerous moment may be a sudden gap between debt outstanding and the permitted borrowing base. Review field-examination costs, reporting deadlines, cash dominion, appraisals, and additional reserves. A large facility limit is useful only to the extent that eligible assets support actual draws.

Assess availability and the work required to maintain it

An asset-based lender may look beyond the headline facility size to a recurring calculation of eligible collateral. The OCC’s supervisory handbook explains why receivables age, customer concentration, returns and inventory quality matter to availability. The resulting formula belongs to the individual agreement. Do not import an advance percentage from an example into your own forecast as if it were a lender commitment.

Prepare a sample reporting package before closing. Reconcile receivables and inventory to the general ledger for the same date, and explain exclusions. Assign responsibility for certificates, supporting schedules and customer-payment records. A business should know how quickly it can produce accurate reports and what happens if the reporting is late. Financing that relies on those systems is also an operational undertaking.

Source: OCC: accounts receivable and inventory financing · BDC: inventory financing

Work through a realistic scenario

Consider a fictional $500,000 facility. Assume $300,000 of eligible receivables at 80%, $100,000 of eligible inventory at 40% and a $20,000 reserve. The borrowing base is $260,000: $240,000 plus $40,000 minus $20,000. With $230,000 drawn, headroom is $30,000. If $50,000 of receivables becomes ineligible, the base drops by $40,000 to $220,000, leaving debt $10,000 above the assumed base. The lender’s real remedies depend on the agreement; the example shows why the $500,000 headline is not cash availability.

Compare this structure with a cash-flow facility

Asset-based credit can connect borrowing to operating assets, while a cash-flow term facility follows a different payment and underwriting framework. Compare reporting costs, appraisals, reserves and control of collections alongside interest. Test the effect of the largest customer paying late and of stock becoming obsolete. Ask how changes are communicated and whether the business has enough uncommitted cash to respond.

Check how often availability is updated and whether an increase requires additional approval before money can be drawn.

• Which invoices and stock are excluded, and can the exclusions change?
• What reserves and concentration limits apply?
• How are collections used to reduce the drawn balance?
• What action is required if the borrowing base falls below outstanding debt?

Your next-step checklist

• Conservative borrowing-base model
• Reliable receivables and inventory reporting
• Existing liens and collateral priority
• Availability under a customer delay or inventory write-down