Borrowing Against Your Assets: An Interactive Guide
Asset-Based Lending is a revolving credit facility where borrowing capacity is determined by the value of a company's assets—primarily accounts receivable and inventory—rather than cash flow or EBITDA multiples.
Borrowing Capacity = (Eligible Assets × Advance Rates) - Reserves
Instead of asking "Can you generate enough cash flow to pay us back?", ABL lenders ask "If we had to liquidate your assets tomorrow, would we get our money back?"
Availability tied to collateral values, not EBITDA or leverage ratios. Your borrowing base grows automatically as assets increase.
Borrow, repay, and reborrow as needed within your borrowing base. Perfect for seasonal businesses.
Monthly (or weekly) borrowing base certificates, field exams, inventory counts, and receivables audits.
Available to companies with weak cash flow, losses, or turnaround situations—as long as assets are strong.
Company purchases $10M of raw materials. ABL advance: 50% × $10M = $5M available to borrow.
Inventory becomes finished goods, sold on credit. Creates $15M of receivables.
Now have $15M receivables. ABL advance: 85% × $15M = $12.75M available (inventory gone).
Customers pay $15M. Cash sweeps to lender via lockbox, reducing outstanding borrowings.
Use freed-up capacity to buy more inventory. Borrowing base expands and contracts with business cycle.
Notice how the facility "self-liquidates" as inventory turns into receivables and receivables turn into cash. The lender is always secured by assets that are actively converting to cash. This is why ABL works for companies with weak earnings—the focus is on asset turnover, not profitability.
| Industry/Situation | Why ABL Works | Example |
|---|---|---|
| Retailers | High inventory turnover, strong receivables if selling on credit | Department stores, specialty retail |
| Distributors | Asset-rich (inventory + receivables) but low margins | Wholesale distributors, import/export |
| Manufacturing | Significant inventory and receivables, cyclical earnings | Automotive suppliers, industrial goods |
| Turnarounds | Negative earnings but valuable assets; traditional lenders exit | Companies in Chapter 11, operational restructurings |
| Seasonal Businesses | Working capital needs fluctuate dramatically; ABL scales naturally | Toy manufacturers, agricultural companies |
| LBO Financing | Provides working capital revolver alongside term debt | PE-backed acquisitions needing operating liquidity |
Not all assets are created equal. ABL lenders apply different "advance rates" (loan-to-value ratios) based on how quickly and reliably assets can be converted to cash.
80-90%
Why High: Turn to cash in 30-60 days. Easy to verify and collect.
Ineligibles: >90 days old, disputed, foreign (sometimes), affiliates
50-65%
Why Medium: Must be sold first, risk of obsolescence, takes time to liquidate.
Ineligibles: Obsolete, slow-moving (>1 year), damaged, consignment
40-50%
Why Lower: Must be processed before sale. Limited market if specialized.
Risk: May have little value outside company's specific use case
60-80%
Based On: Orderly liquidation value from independent appraisal.
Note: General-purpose equipment gets higher rates than specialized
60-75%
Based On: Appraised value. Higher for marketable locations.
Variable: Industrial buildings < Office buildings < Prime retail
0-20%
Why Low/None: Difficult to value and liquidate. Rarely included in traditional ABL.
Exception: Proven licensing revenue may get some credit
Advance rates reflect what a lender could recover if they had to seize and sell assets in a distressed scenario:
Accounts Receivable (85%): Most are collectible, even in bankruptcy. Customers still owe money. Loss: ~15% from disputes, returns, bad debts.
Inventory (50%): Must be sold at discount in liquidation. Fire sale pricing = 50-60 cents on the dollar after liquidation costs.
Equipment (70%): Based on professional appraisal of "orderly liquidation value" (not fire sale, but not patient sale either). Cushion for market changes.
The key: over-collateralization. If you borrow $85 against $100 of receivables, the lender has a 15% cushion if some go bad.
| Asset Type | Eligible | Ineligible |
|---|---|---|
| Receivables | < 90 days old, creditworthy customers, proper documentation | > 90 days, disputed, foreign (often), affiliates, contra accounts, government (sometimes) |
| Inventory | Finished goods < 1 year old, raw materials with ready market, normal turnover | Obsolete, slow-moving, damaged, consigned, customer-specific, WIP beyond certain % |
| Equipment | Owned (not leased), good condition, general-purpose, recent appraisal | Leased, specialized with no resale market, liens by others, located outside U.S. (sometimes) |
Notice that old receivables (>90 days) and slow-moving inventory don't count toward your borrowing base. This can create a trap:
• Company struggles to collect from customers
• Receivables age beyond 90 days
• Suddenly become ineligible
• Borrowing base drops
• May not have enough availability to operate
• This is called a "borrowing base squeeze" and can trigger a crisis
Calculate your available credit by applying advance rates to your assets. See how changes in asset values affect borrowing capacity in real-time.
Adjust outstanding borrowings to see remaining availability:
Borrowers must submit a detailed "Borrowing Base Certificate" (BBC) each month (or week in stressed situations):
What's included:
• Accounts receivable aging (current, 30, 60, 90+ days)
• Inventory breakdown by category and age
• Equipment values per last appraisal
• Calculation of ineligibles
• Application of advance rates
• Subtraction of reserves
• = Total Availability
Compliance requirement: If outstanding borrowings exceed borrowing base, company must immediately pay down or request overadvance permission.
This is called an "overadvance" and is a covenant violation:
Scenario: Your borrowing base drops from $40M to $30M due to slow collections and inventory build, but you have $35M outstanding.
Options:
1. Pay down $5M immediately (but where do you get the cash?)
2. Request temporary overadvance (lender may charge higher interest + fees)
3. Find new assets to pledge (equipment appraisal, new receivables)
4. Default (if you can't cure, lender can demand full repayment)
This is why ABL borrowers obsess over asset management and collection practices!
ABL lenders maintain tight control over collateral through active monitoring and cash management systems.
Frequency: Monthly (or weekly for troubled credits)
Purpose: Self-reported asset values and eligibility
Verification: Tested against field exams and audits
Frequency: 1-2x per year (or more if needed)
Process: Lender's team visits site, physically counts inventory, tests receivables
Cost: $25K-75K per exam, paid by borrower
What: Contact sample of customers to verify invoices are real and accurate
Test: Confirm amounts owed, dispute status, payment terms
Goal: Detect fraud, errors, or quality issues
Method: Physical walk-through of warehouse/facility
Testing: Random samples counted and reconciled to records
Red flags: Obsolete goods, damaged items, missing inventory
Setup: Customer payments go to bank lockbox, not company
Sweep: Collections automatically apply to reduce loan balance
Dominion: Lender controls when/if company can access cash
Frequency: Every 1-2 years or when adding new equipment
Standard: Orderly Liquidation Value (OLV) from certified appraiser
Update: Market changes may reduce values and borrowing base
Without a lockbox, a struggling company might:
• Use collections to pay other creditors
• Pay owner distributions
• Fund operations that don't increase collateral
With lockbox control, the ABL lender ensures every dollar collected goes toward paying down the loan first. This protects the lender in case of rapid deterioration—they're continuously converting receivables to cash repayment.
| Reserve Type | Purpose | Typical Amount |
|---|---|---|
| Dilution Reserve | Credits, returns, discounts that reduce receivable values after booking | Historical dilution % (often 2-5%) |
| Rent Reserve | Landlord has superior lien on inventory at leased premises | 3-6 months of rent |
| Customer Deposit Reserve | Customer deposits that might offset receivables | 100% of deposit balances |
| Availability Reserve | General cushion for unidentified risks | $1-5M or 5-10% of base |
| Seasonality Reserve | Accounts for seasonal fluctuations in asset quality | Varies by season |
Reserves can significantly reduce availability and may change over time:
Example:
• Gross receivables: $20M
• 85% advance rate: $17M
• Less: Dilution reserve (3%): $0.6M
• Less: Rent reserve (6 months × $200K): $1.2M
• Less: Availability reserve: $2M
• Net availability: $13.2M (only 66% of receivables!)
Lenders can impose new reserves at any time if risks emerge, instantly reducing your borrowing capacity.
Understanding when to use ABL versus traditional cash flow-based financing is critical for capital structure optimization.
| Feature | Asset-Based Lending (ABL) | Cash Flow Lending |
|---|---|---|
| Availability Determined By | Collateral values × advance rates | EBITDA multiples, leverage ratios |
| Primary Covenants | Borrowing base compliance, minimum availability ($) | Leverage ratio, fixed charge coverage, EBITDA minimums |
| Monitoring Intensity | Very high: monthly BBCs, field exams, audits | Low: quarterly financials, annual review |
| Interest Rate | SOFR + 200-400 bps (higher) | SOFR + 150-300 bps (lower) |
| Structure | Revolving, fluctuates with assets | Term loan or committed revolver |
| Advance Rate | Often higher % of working capital | Limited by leverage multiples |
| Credit Quality | Accepts weaker credits, turnarounds, volatility | Requires stable earnings, investment grade profile |
| Amortization | None (self-liquidating revolver) | Typically 1-2% annually on term loans |
| Fees | Higher (field exam costs, unused line fees) | Lower (standard closing/commitment fees) |
| Financial Reporting | Weekly/monthly BBCs + quarterly financials | Quarterly financials, annual audit |
| Cash Control | Lockbox, springing cash dominion | Minimal, company controls collections |
| Best For | Asset-rich, cash-flow-challenged, seasonal, turnaround | Stable earnings, predictable cash flow, lower working capital |
High working capital but low/negative EBITDA. Traditional lenders look at leverage (Debt/EBITDA) and say no. ABL looks at receivables and says yes.
Need $50M in Q3 for holiday inventory but only $10M in Q1. ABL automatically scales with your asset cycle.
Operating losses, covenant violations, traditional lenders exiting. ABL provides liquidity during restructuring if assets are valuable.
Banks offer 3x EBITDA ($15M) but you have $30M of receivables + inventory. ABL can lend $20M+ against working capital.
Growing 50%/year. Receivables and inventory expanding faster than EBITDA. Need financing that grows with sales, not last year's earnings.
Business model is high turnover with thin margins. Assets turn quickly but EBITDA margins are only 3-5%. Asset-based approach fits better.
Company Profile:
• $100M annual revenue, $6M EBITDA
• Sells 70% of products in Q4 (holiday season)
• Must build inventory Q2-Q3, collect in Q4-Q1
Cash Flow Approach:
• Bank offers 4x EBITDA = $24M term loan
• Revolver capped at 1x EBITDA = $6M
• Total debt capacity: $30M
• Problem: Need $45M in Q3 for inventory build!
ABL Approach:
• Q1-Q2: Low season, minimal assets
→ $5M receivables × 85% = $4.25M
→ $8M inventory × 50% = $4M
→ Total availability: ~$8M ✅ (matches need)
• Q3: Inventory peak for holiday production
→ $10M receivables × 85% = $8.5M
→ $60M inventory × 50% = $30M
→ Total availability: ~$38M ✅ (enough for peak)
• Q4: Inventory sold, receivables peak
→ $70M receivables × 85% = $59.5M
→ $15M inventory × 50% = $7.5M
→ Total availability: ~$67M (way more than needed)
• Q1: Collections roll in, pay down facility
→ Back to $8M, cycle repeats
Result: ABL automatically provided the exact liquidity needed at each phase of the business cycle. Cash flow lending couldn't flex enough to handle seasonal swings.
| Cost Component | ABL | Cash Flow |
|---|---|---|
| Interest Rate | SOFR + 2.5-4.0% | SOFR + 2.0-3.0% |
| Unused Fee | 0.375-0.50% on unused portion | 0.25-0.375% |
| Closing Fee | 1.0-2.0% of commitment | 0.5-1.0% |
| Field Exam | $25K-75K per exam (1-2x/year) | None |
| Appraisal | $10K-25K every 1-2 years | Rare/one-time |
| Collateral Management | $25K-100K annually | Minimal |
| All-In Cost | 6-9% effective | 5-7% effective |
ABL is 1-2% more expensive all-in than cash flow lending because of:
• Higher base interest rates (more risk, more work)
• Field exam fees (must verify collateral)
• Appraisal costs (equipment, real estate)
• Collateral monitoring systems and personnel
But this is often worth it because ABL provides:
• More availability (get 30-50% more liquidity)
• Flexibility (scales with business automatically)
• Access (available when traditional lenders say no)