Asset-Based Lending: Unlocking Working Capital from AR and Inventory

You've got $2 million in accounts receivable from creditworthy customers. You have $1 million in saleable inventory. But your traditional bank says you don't qualify for more credit because your profitability is thin.

This is where asset-based lending shines. Instead of lending based primarily on cash flow and profitability, ABL lenders focus on the value of your assets. If you have quality receivables and inventory, you can access capital—even during turnarounds, rapid growth, or periods of thin margins.

What Is Asset-Based Lending?

Asset-based lending is a form of secured financing where the loan amount is tied directly to the value of specific company assets—primarily accounts receivable and inventory. The lender calculates a "borrowing base" based on eligible assets and advances a percentage of that base.

How ABL Differs from Traditional Loans

How Asset-Based Lending Works

The Borrowing Base

The core concept in ABL is the borrowing base—a calculated maximum loan amount based on eligible collateral. A typical borrowing base formula:

You can borrow up to the borrowing base. As your receivables and inventory change, so does your available credit.

Eligible vs. Ineligible Assets

Not all receivables and inventory qualify. Lenders apply eligibility criteria:

Eligible Accounts Receivable typically:

• Are less than 90 days old
• Are from creditworthy customers
• Are not from affiliates or related parties
• Are not subject to disputes or offsets
• Are not foreign (unless specifically included)
• Do not exceed concentration limits (e.g., no single customer over 25%)

Eligible Inventory typically:

• Is finished goods or raw materials (not work-in-progress)
• Is saleable at normal terms
• Is not obsolete or slow-moving
• Is located at approved locations
• Is not consigned or subject to liens

Advance Rates

The advance rate is the percentage of eligible assets the lender will advance. Typical rates:

• Accounts Receivable: 80-85% (sometimes up to 90% for high-quality AR)
• Inventory - Finished Goods: 50-65%
• Inventory - Raw Materials: 40-50%
• Equipment: 50-80% of forced liquidation value (if included)

ABL Costs and Fees

Asset-based lending costs more than traditional bank loans due to higher monitoring requirements, but less than alternative lenders.

Interest Rates

• Typical range: Prime + 1.5% to Prime + 4% (currently 10-13%)
• Variable rate: Most ABL facilities are variable, tied to Prime or SOFR
• Rate factors: Facility size, asset quality, company financials, lender competition

Fees

• Facility fee: 0.25-0.50% of total facility annually
• Unused line fee: 0.25-0.50% on unused portion
• Collateral monitoring fee: $500-$2,000/month for field exams and reporting
• Closing costs: Legal, appraisal, due diligence ($25,000-$75,000 for a typical facility)
• Field exam fees: $5,000-$15,000 per audit (typically 2-4 per year)

All-In Cost Comparison

For a $3 million ABL facility at Prime + 2.5% with typical fees:

When ABL Makes Sense

Ideal ABL Candidates

• Rapid growth companies: Revenue growing faster than profits; need working capital to fund AR and inventory buildup
• Turnaround situations: Company has good assets but weak profitability; needs capital to execute turnaround
• Seasonal businesses: Need to build inventory pre-season; ABL availability grows with inventory
• Acquisition financing: Acquirer can borrow against target's assets post-close
• Companies exceeding traditional bank limits: Need more capital than cash flow-based lending allows

Asset Requirements

ABL works best when you have:

• Quality accounts receivable from creditworthy commercial customers
• Diversified customer base (no excessive concentration)
• Inventory that's saleable and not highly specialized
• Good record-keeping and accounting systems
• Minimum facility size of $1-2 million (smaller deals often aren't economical)

When ABL May Not Work

• Service businesses: No inventory and receivables may be small or progress-billed
• B2C companies: Consumer receivables are harder to lend against
• Long collection cycles: AR over 90 days becomes ineligible
• Highly concentrated customers: If one customer is 50%+ of AR, lenders get nervous
• Specialized inventory: Custom or perishable goods are poor collateral

Operational Requirements

ABL facilities come with more operational requirements than traditional loans.

Reporting Requirements

• Borrowing base certificate: Weekly or monthly report showing eligible collateral and availability
• Accounts receivable aging: Detailed aging report by customer
• Inventory reports: Detailed inventory by category and location
• Collection reports: Cash receipts applied to AR
• Financial statements: Monthly internally-prepared, annual audited or reviewed

Field Exams

Lenders conduct field exams (audits) of your collateral—typically quarterly for new borrowers, semi-annually once established. The examiner will:

• Verify receivable balances with customers (confirmations)
• Test inventory counts and values
• Review collection patterns and dilution
• Assess controls over billing and cash receipts
• Identify potential eligibility issues

Lockbox/Blocked Account

Most ABL lenders require a lockbox arrangement where customer payments go directly to a lender-controlled account. The lender applies collections to reduce your outstanding balance, then releases availability for you to re-borrow.

Choosing an ABL Lender

Types of ABL Providers

• Bank ABL groups: Large banks have dedicated ABL units. Often best rates for larger facilities ($10M+)
• Commercial finance companies: CIT, Wells Fargo Commercial Finance, PNC Business Credit—specialists in middle-market ABL
• Regional ABL lenders: Focus on smaller deals ($1-5M), often more flexible
• Factors: Different from ABL—they buy your receivables rather than lending against them. Simpler but often more expensive

What to Compare

• Advance rates (higher is better)
• Interest rate spread
• All-in fees (facility, unused, monitoring)
• Flexibility on eligibility criteria
• Field exam frequency and cost
• Minimum facility size and term
• Reporting requirements
• Experience in your industry

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