Asset-Based Lending
“Asset Power = Borrowing Power”
What Is Asset-Based Lending?
Asset-Based Lending (ABL) is a powerful financing tool that allows businesses to convert their balance sheet assets into working capital. By using assets like accounts receivable, inventory, equipment, or real estate as collateral, companies can unlock liquidity to support day-to-day operations, manage cash flow gaps, or fuel strategic growth — in particular when traditional financing is out of reach.
Asset-Based Lending is a form of secured business financing where the loan or line of credit is backed by the value of a company’s assets. It’s commonly used by growing, seasonal, or restructuring companies that may not qualify for cash flow-based loans but have strong asset positions.
🧩 How ABL Works: The Building Blocks
An ABL facility typically takes the form of a revolving line of credit, where borrowing capacity is directly tied to a borrowing base — a calculation based on the value of eligible collateral.
Typical Collateral Includes:
- Accounts Receivable (AR)
- Inventory: Raw materials or finished goods
- Equipment & Machinery: Based on appraised value
- Real Estate: Commercial property with stable value
As the value of the underlying collateral fluctuates (e.g., as receivables are collected or inventory turns), the borrowing base adjusts dynamically.
🔄 Borrowing Base & Advance Rates
At the heart of ABL is the borrowing base, which determines how much credit is available at any point in time. Lenders calculate this using regular reporting from the business, such as receivables aging reports, inventory counts, and other asset documentation.
| Asset Type | Typical Advance Rate |
|---|---|
| Accounts Receivable | 70%–90% |
| Inventory | 30%–60% |
| Equipment | 50%–80% (appraised) |
| Real Estate | 50%–75% (LTV basis) |
📊 Borrowing Base Example
🔹 Scenario:
ABC Distributors, Inc. is applying for a $2,000,000 ABL revolving line of credit. The lender will use the company’s Accounts Receivable and Inventory and Equipment as collateral. Here’s how the borrowing base is calculated:
🔸 Step 1: Eligible Collateral Summary
Asset Type | Gross Value | Ineligible | Eligible Amount | Advance Rate | Borrowing Base Value |
Accounts Receivable | $1,200,000 | $200,000 (past 90 days) | $1,000,000 | 85% | $850,000 |
Inventory (Finished) | $900,000 | $100,000 (obsolete/slow) | $800,000 | 50% | $400,000 |
Inventory (Raw Mat.) | $300,000 | $0 | $300,000 | 30% | $90,000 |
Equipment | $750,000 (appraised) | N/A | $750,000 | 50% | $375,000 |
🔸 Step 2: Total Borrowing Base
$850,000 (AR) + $400,000 (Inventory – Finished) + $90,000 (Inventory – Raw) + $375,000 (Equip.) = $1,715,000
🔸 Step3: Loan Availability (After Reserves)
- Borrowing Base Total: $1,715,000
- Lender Reserve* (for fees & dilution): $115,000 (*see below)
- Net Availability: $1,600,000
Notes:
- Borrowing base is updated monthly or weekly depending on lender requirements.
- As receivables are collected or inventory is sold, new borrowing capacity is freed up.
- Collateral eligibility is subject to lender guidelines (aging, customer concentration, audit).
✅ What This Shows:
This example illustrates how a business can unlock over $1.6M in liquidity based on the assets it already owns — without needing strong cash flow or traditional unsecured credit.
Common Types of Reserves in ABL
A lender reserve is an amount set aside by the lender to protect against potential risks or costs associated with the loan. It reduces the borrower’s actual availability, even if the collateral supports a higher amount. (In the above example, it’s $115,000 deducted from the $1,715,000 total borrowing base, leaving $1,600,000 available for the borrower to draw.)
Dilution Reserve
- Dilution refers to reductions in accounts receivable value from credit memos, returns, bad debt, or chargebacks.
- If your AR is valued at $1M but historical dilution is 8%, a lender might reserve 5–10% just in case.
- Helps ensure the lender isn’t lending against overvalued receivables.
Fees & Interest Reserve
- Covers interest charges, audit fees, or field exam costs.
- Lender may set aside a portion of the base to ensure there are always funds to cover these obligations.
Other Operational Reserves
- Could include reserves for tax liabilities, payroll obligations, or inventory write-down risk.
ABL Discussion & Practicalities
Is ABL Right for Your Business?
Asset-Based Lending is most effective for businesses that:
- Are asset-rich but cash-flow challenged
- Are in restructuring or turnaround situations
- Need working capital tied to sales cycles or receivables
- Operate in industries where traditional banks are hesitant
If your company has strong receivables or inventory, but needs liquidity to grow or stabilize, ABL could be a valuable tool in your financing strategy.
Considerations and Risks
While ABL can be a great solution, business owners should also be aware of:
- Administrative Burden: Requires frequent reporting and tracking
- Variable Borrowing Capacity: Loan availability may shrink if asset value drops
- Costs: Fees, interest rates, and appraisal expenses may be higher than conventional credit
- Lender Oversight: More direct involvement in your working capital
What Lenders Look For
To qualify for an ABL facility, businesses should have:
- Strong and verifiable asset records (especially AR/inventory)
- Solid customer base and receivable collection process
- Transparent financial reporting
- Operational controls (e.g., inventory management, ERP systems)
Lenders often conduct field audits or collateral appraisals as part of their underwriting process.
Final Thoughts on Asset-Based Lending (ABL)
Asset-Based Lending can be a strategic liquidity solution for businesses that want to leverage their own strength:
their assets. If your assets are strong, ABL can help turn them into opportunity.
Whether you’re navigating a growth phase, managing seasonal swings, or working through a turnaround, ABL offers flexibility and access to capital when traditional loans may fall short. Instead of focusing solely on past profitability or credit metrics, ABL focuses on the value you’ve already built — in your receivables, inventory, equipment, and real estate.
That said, ABL isn’t for everyone. It comes with increased reporting requirements, ongoing monitoring, and the need for operational discipline.
But for businesses with solid collateral and a clear plan, it can be a powerful engine for working capital, expansion, or recovery.