What is Asset-Based Lending (ABL)?
Asset-based lending (ABL) is a financing structure where a lender provides capital secured by a borrowing base derived from a business's assets. Unlike cash-flow lending, which relies primarily on earnings and debt service coverage, ABL focuses on the liquidation value of collateral.
This structure is commonly used by businesses in retail, distribution, and manufacturing sectors where significant working capital is tied up in inventory and accounts receivable.
Common Asset Types
Lenders typically consider the following asset types when structuring ABL facilities:
- Accounts Receivable (AR): Outstanding customer invoices, typically evaluated for concentration, aging, and customer creditworthiness.
- Inventory: Raw materials, work-in-progress, and finished goods. Lenders often assess inventory turnover, obsolescence risk, and marketability.
- Equipment: Machinery, vehicles, and other tangible assets with resale value. Appraisals are commonly required.
- Real Estate: Owned property may provide additional collateral value in some structures.
How Lenders Typically Think About Borrowing Bases
A borrowing base is a calculation that determines how much a business can borrow at any given time. Lenders apply advance rates (percentages) to eligible asset values to determine availability.
For example, a lender might advance 85% against eligible accounts receivable and 50% against eligible inventory. These rates vary by lender, industry, and borrower risk profile. The borrowing base fluctuates as asset values change, meaning availability can increase during peak seasons and decrease during slower periods.
When ABL is Commonly Used
Asset-based lending structures are frequently utilized in the following scenarios:
- Seasonality: Businesses with cyclical inventory needs may benefit from the flexibility of a borrowing base that adjusts with asset levels.
- Growth: Companies expanding rapidly may need capital tied to their growing asset base rather than historical cash flow.
- Turnarounds: Businesses with operational challenges but valuable assets may find ABL more accessible than traditional lending.
- Acquisitions: ABL can provide acquisition financing when assets are readily identifiable and valuable.
Pros & Limitations
Potential Advantages:
- Flexibility as borrowing capacity adjusts with asset levels
- May be available to businesses that don't qualify for cash-flow lending
- Can support higher leverage in asset-rich businesses
- Typically allows for growth financing
Typical Limitations:
- Regular reporting requirements (often weekly or monthly borrowing base certificates)
- Field exams and audits conducted periodically by lenders
- Advance rates may be conservative relative to book values
- Costs can be higher than traditional term debt
- Over-advances or availability constraints can occur during downturns
What Lenders Typically Review
When evaluating an ABL opportunity, lenders commonly assess:
- Quality and composition of accounts receivable and inventory
- Historical financial statements and cash flow trends
- Management experience and operational capabilities
- Customer and supplier concentration risks
- Industry dynamics and competitive positioning
- Asset valuation through appraisals or field exams
Each lender has its own underwriting standards and criteria, which can vary significantly based on the lender's risk appetite, industry focus, and transaction size.
This article is for educational purposes only and does not constitute financing advice or a recommendation of any lender or financing product. All financing decisions should be made directly between you and a lender.