Asset-Based Lending
Commercial lending facility secured by specific business assets, typically receivables and inventory.
Asset-based lending (ABL) is a form of commercial financing in which loan availability is determined by the borrower's eligible collateral—most commonly accounts receivable and inventory, but also machinery, equipment, and real estate—rather than the borrower's overall creditworthiness or cash flow. A borrowing base calculation, updated frequently (often daily or weekly), determines how much the borrower can draw at any given time.
The borrowing base formula typically allows: 80–85% of eligible accounts receivable (invoices less than 90 days old, excluding concentrations above specified limits, government receivables, or foreign receivables) plus 50–65% of eligible inventory (based on net orderly liquidation value, excluding slow-moving or obsolete inventory).
ABL is ideal for companies with asset-heavy business models but earnings volatility: distributors, manufacturers, retailers, and companies in cyclical industries. A company with $10M in receivables and $5M in eligible inventory might access an ABL facility of $10–11M, providing substantial liquidity regardless of its current-year profitability.
ABL lenders conduct ongoing monitoring of collateral through weekly or monthly borrowing base certificates (certifications from the borrower) and periodic field examinations (audits of receivables and inventory by the lender). Financial covenants in ABL facilities tend to be lighter than in cash flow loans because the lender's primary protection is the collateral.
Advanced ABL facilities may include real estate, machinery, or intellectual property components for additional borrowing capacity. Private equity sponsors use ABL facilities alongside term loans to fund leveraged buyouts of asset-intensive businesses, maximizing leverage against multiple asset pools.
FAQs
How does a borrowing base certificate work in ABL?
A borrowing base certificate (BBC) is a report submitted by the borrower to the ABL lender (typically weekly or monthly) documenting current eligible collateral: gross receivables less ineligibles (receivables past 90 days, cross-aged, contra accounts, government receivables, foreign) multiplied by the advance rate, plus eligible inventory multiplied by the inventory advance rate. The resulting total is the borrowing base—the maximum amount available under the facility. If the outstanding loan balance exceeds the borrowing base, the borrower must immediately repay the excess. Lenders verify BBCs through periodic field exams.
What makes receivables 'ineligible' in an ABL facility?
Common ineligibility criteria for receivables include: invoices more than 90 days past invoice date (or 60 days past due), concentration limits exceeded (e.g., no single debtor can represent more than 25% of eligible receivables without approval), government receivables (subject to assignment of claims act restrictions), foreign receivables without appropriate credit insurance or letters of credit, related-party receivables, contra-accounts (where the debtor also has claims against the borrower), invoices in dispute, and receivables where the underlying goods haven't been delivered or services haven't been performed. Each of these ineligibilities reduces borrowing availability.
How does ABL compare to cash flow lending?
Cash flow lending (leveraged loans, term loans B) is sized and priced based on a multiple of EBITDA—borrowers access capital based on earnings power. ABL is sized based on asset value—borrowers access capital based on collateral. Cash flow lending is better for asset-light, high-margin businesses with predictable EBITDA; ABL is better for asset-intensive businesses with volatile earnings. ABL facilities typically have no fixed amortization (revolving), while term loans amortize. ABL covenants are lighter (often just a springing fixed charge coverage ratio triggered by availability falling below a threshold); cash flow loans have tighter leverage and coverage maintenance covenants.
Related Terms
Factoring
Selling accounts receivable to a third party at a discount in exchange for immediate cash.
Revolving Credit Facility
Flexible bank credit line allowing repeated borrowing and repayment up to an approved limit.
Mezzanine Financing
Hybrid debt-equity capital subordinated to senior debt, carrying higher yields and often warrant coverage.
Subordinated Debt
Debt that ranks below senior obligations in payment priority in the event of default or liquidation.
