Asset-based lending

How it works

Asset-based lending ties credit availability to a borrowing base of qualifying receivables, inventory, equipment, or other assets. Advance rates and exclusions reflect how the lender values and can realize those assets. Availability changes as the asset pool changes.

Where it can fit

It can suit an asset-rich business with a sizeable working-capital cycle, especially when conventional cash-flow lending does not fit the whole need. Reliable reporting and control over collateral are central to the structure.

Look closely at the trade-offs

Book value is not lending value. Inventory that is slow-moving, obsolete, consigned, or difficult to sell may be excluded. Ask about field examinations, appraisals, reporting fees, reserves, and what happens when collateral values decline.

Separate the assets from the limit

A borrowing base combines eligible asset values using the agreement’s calculation. Build one line for each asset category, one for deductions and one for existing debt. A facility can have both an overall cap and smaller caps for inventory or equipment. Do not count the same underlying sale once as finished goods and again as a receivable after it has been invoiced.

Source: OCC: Accounts Receivable and Inventory Financing

Worked example: two asset pools, one availability figure

Assume a fictional distributor has $300,000 of eligible receivables and $200,000 of eligible inventory. Invented advance rates of 80% and 40% produce $240,000 and $80,000 respectively. Together that is $320,000. Deduct a $20,000 reserve to reach $300,000. If the facility cap is $350,000 and the company has drawn $260,000, remaining room is $40,000, not $90,000. The collateral calculation is the constraint.

Suppose an inventory review reduces eligible inventory to $125,000. Its contribution falls to $50,000, so availability falls by $30,000 to $10,000. An operating forecast that relied on the old $40,000 figure is now missing $30,000. A scenario like this helps the owner decide how much cash buffer to retain and how early to discuss an upcoming stock write-down. None of these percentages represents a lender quote.

Make administration part of the financing decision

Ask your finance team to produce a sample borrowing-base certificate before closing. Time the work needed to reconcile invoices, stock records, credit notes and collections. Include field-exam, appraisal and monitoring charges when comparing proposals. If reporting is difficult today, a larger revolving facility may increase the workload at precisely the point the business is growing.

Consider what happens when assets are sold or another lender seeks security. Document the intended use of proceeds and any consent needed for replacement equipment or asset disposals. ABL is still debt: the value of collateral does not remove the need for an operating plan that supports costs and obligations.

For an offer comparison, ask each lender to calculate availability from the same dated asset file. Otherwise one quote may look larger simply because it used different inventory or receivables figures. Show the proposed fees beside the calculated cash headroom, and keep a separate list of reporting obligations. The comparison should make clear both how much cash is available on day one and what the business must do to keep using the facility.

• Which valuation basis is used for each asset category?
• What triggers a new appraisal, reserve or revised advance rate?
• Who controls collections and approves additional drawings?
• What liquidity remains if inventory or one large customer becomes ineligible?

Your next-step checklist

• Borrowing-base model
• Receivables and inventory reports
• Lien and priority review
• Appraisal and audit requirements