Asset-based lending is a first-lien revolving credit facility secured by short-term assets, primarily accounts receivable and inventory. Unlike cash flow loans that rely on EBITDA, ABL underwriting focuses on liquidation values and a borrowing base that translates changing collateral pools into real-time credit limits.
ABL succeeds when collateral quality is strong, reporting is disciplined, and the lender truly controls cash. It fails when those three conditions slip. While ABL borrows tools from factoring and securitization, it remains a distinct product that blends lockbox cash control, eligibility tests, third-party appraisals, and field examinations to monitor risk continuously.
Borrowers seek flexibility and minimal reserves to convert working capital into liquidity. Lenders structure for orderly liquidation outcomes and price to defend against risk creep. Independent appraisers and field examiners test data, systems, and controls to support prudent advance rates across cycles.
Customer payments flow to lockboxes or blocked accounts under lender control. Daily sweeps repay the revolver automatically, and new borrowings then fund disbursements. Many facilities use springing dominion, where the borrower controls operations until cash dominion triggers activate when excess availability dips below a threshold for a defined period.
Collections first reduce outstanding borrowings. Letters of credit sit as a reserve in the borrowing base and are cash-collateralized after a default. Split-lien structures use intercreditor agreements: the ABL holds a first lien on working capital and a second lien on fixed assets, while the term loan reverses that position. Because collateral reporting is central, ABL information rights are broad and include AR agings, inventory detail, perpetual tie-outs, sales logs, credit memos, and reserve calculations.
Standard collateral covers accounts receivable and inventory, with common add-ons such as credit card receivables, in-transit inventory, and sometimes equipment via separate term facilities. Lenders perfect first-priority security interests in collateral and proceeds to secure repayment.
In the United States, Article 9 of the Uniform Commercial Code governs security interests. Perfection typically requires UCC-1 filings and deposit account control agreements to secure cash management priority. Blocked or springing control arrangements are standard under UCC provisions on deposit accounts. Landlord waivers, bailee letters, and consignment notices address third-party rights that could prime the lender.
Canada’s provincial Personal Property Security Act regimes operate similarly, with local nuances. In the United Kingdom, ABL relies on fixed and floating charges under all-assets debentures, plus inventory security and blocked accounts. Floating charges can trigger a prescribed part for unsecured creditors, which matters for exit analyses. Cross-border facilities add complexity because local perfection steps and exchange rules can slow closings. Non-US or non-UK collateral is often excluded or subordinated and sometimes modeled synthetically in the base.
Unlike securitizations, true sale is not sought. Ring-fencing and special purpose vehicles are rare in corporate ABL, since collateral remains on the borrower’s balance sheet. The structure relies on cash control, lien priority, and ongoing collateral monitoring.
The borrowing base measures asset quality and converts it into lending capacity. It usually updates weekly or monthly and moves with orders, collections, inventory receipts, and reserves. During tight liquidity, many borrowers report daily.
Agents can cap any category through concentration limits. The borrowing base net of reserves produces formula-derived Availability, which governs capacity to draw, and it often drives covenant and dominion triggers.
Reserves adjust the formula for risks not captured by base advance rates. Agreements distinguish formula reserves with explicit definitions from discretionary reserves that the agent can set using reasonable credit judgment. Borrowers negotiate reasonableness standards and notice periods, but discretion is broad.
Numerical example. Assume eligible AR of 80 million at an 85 percent advance rate; inventory at 70 million cost with NOLV equal to 60 percent of cost and an 85 percent advance on NOLV; and reserves of 2 million for landlords, 3 percent of gross AR for dilution, and 1 million for LC and duties.
AR availability = 0.85 x 80m = 68.0m. Inventory availability = 0.85 x (0.60 x 70m) = 35.7m. Gross availability = 103.7m. Reserves = 2.0m + 2.4m + 1.0m = 5.4m. Net availability = 98.3m before outstanding LC and other carve-outs. Field exams and appraisals frequently reset reserves as operations evolve, such as after store closures, divestitures, or new processor arrangements.
Field examinations validate collateral quality, control systems, and reporting integrity. They are not financial audits. Instead, they test how collateral converts to cash in practice. New facilities typically require initial field exams and appraisals before closing. Ongoing exams run semi-annually or quarterly for higher-risk borrowers, and borrowers pay the costs.
Inventory advance rates hinge on third-party appraisals. Appraisers evaluate historical sales, gross margins, discounting patterns, seasonality, private label versus branded mix, sell-through by channel, and supply chain dependencies to determine NOLV by category. Appraisals refresh at least annually and more often for volatile collateral. A core risk in downturns is NOLV compression, so operators must move obsolete stock decisively to preserve appraised values.
Documentation crystallizes structure and timing. Credit agreements set facility size, advance rates, eligibility criteria, reserve menus, reporting cadence, dominion triggers, and covenants. Security agreements grant first-priority liens and include after-acquired property language.
Deposit account control and lockbox agreements deliver control or springing control over cash. Intercreditor agreements in split-lien structures set collateral waterfalls, enforcement standstills, and purchase options. Landlord waivers and bailee letters mitigate priming liens and provide collateral access on default. Borrowing base certificates provide standardized templates with backup schedules.
Agents usually file UCC-1s early and push to complete bank control and landlord waivers before first funding. Appraisals and field exams run in parallel so that advance rates and reserves can be finalized before closing. Multi-lender ABLs often resemble syndicated loans on documentation complexity and agent roles.
ABL pricing uses a spread over SOFR or a base rate. Spreads reflect collateral quality, utilization, volatility, and sponsor support. Some facilities use pricing grids tied to excess availability. Lenders also charge unused line fees, LC fees, collateral monitoring fees, pass-through field exam and appraisal costs, and administrative agent fees.
Illustrative cost. Consider a 150 million revolver at 60 percent average utilization, SOFR at 5.3 percent, a 250 basis point margin, a 37.5 basis point unused fee, 10 million of LC exposure at 250 basis points, and 400,000 per year of monitoring costs. Annual interest equals 0.60 x 150m x 7.8 percent, or about 7.83 million. The unused fee is 0.40 x 150m x 0.375 percent, or 225,000. LC fees are 250,000. Adding 400,000 of fees yields an annual cost near 8.7 million, excluding any upfront fee amortization. Utilization drives the effective cost, and lower utilization amplifies unused fees.
ABL covenants emphasize collateral and liquidity over earnings. Fixed charge coverage often “springs” only when excess availability falls below a set threshold for a defined lookback period. Cash dominion also springs at tighter thresholds to ensure lenders control cash during stress.
Representations cover collateral ownership, perfection steps, and government receivables compliance. Affirmative covenants require collateral reporting, regular appraisals and field exams, and appropriate insurance. Negative covenants limit additional liens, collateral dispositions, and changes to processor agreements or inventory locations that would impair collateral coverage.
From term sheet to funding, domestic ABLs typically take 6-10 weeks. Cross-border facilities take longer due to local perfection and account control steps.
Common failure points surface repeatedly. Borrowers who cannot produce weekly borrowing bases from system data within 48 hours face delays or higher reserves. If key bank accounts, including merchant processor settlement accounts, cannot be brought under control, availability blocks may be permanent. Missing landlord or bailee waivers on key locations lead to higher reserves or ineligible inventory. AR dilution above 5-10 percent without operational fixes triggers punitive reserves or customer exclusions. ERP systems that lack perpetual inventory or cycle counts are fatal for inventory-heavy ABLs. Consignment or bill-and-hold practices that conflict with UCC rules undermine eligibility. Government receivables can be excluded entirely if assignment-of-claims steps are not completed.
ABL structures for a credible, fast exit via liquidation or going-concern sale. On default, lenders tighten dominion, reduce or revoke advances, call overadvances, and raise reserves quickly. Article 9 collateral sales are possible, but most outcomes involve going-concern sales, including court-supervised 363 sales in the United States.
Operational control often matters more than legal theory. Without reliable warehouse access or if processor offsets are large, theoretical lien priority may not produce cash. Foreign collateral enforceability can be slow and uncertain, so many lenders cap foreign eligibility accordingly.
Size the revolver off sustainable eligible collateral and realistic reserves, not management’s gross claims. Model NOLV compression and rising reserves under stress and validate conversion timing assumptions with real data.
Finally, expect repetition. Field exams and appraisals repeat regularly and create a useful feedback loop. Treat trend lines in dilution, SKU aging, and NOLV as leading indicators, not backward-looking audits.
ABL sits beside several financing options. Compared with term-heavy direct lending, ABL is cheaper but more operationally intensive due to reporting and control requirements. In multi-lender settings, documentation and administration can resemble syndicated loans. Borrowers who prefer a single debt layer sometimes choose unitranche loans over split-lien ABL plus term loans, trading higher pricing for structural simplicity. For capital markets alternatives, securitization and other forms of structured credit can finance receivables, but those require true sale and different legal workstreams than corporate ABL.
ABL works when the borrowing base reflects reality, cash dominion is enforceable, and reserves track evolving risks. It fails when collateral quality degrades or reporting and controls are weak. Treat the borrowing base not as a static formula, but as a live test of how quickly your business converts inventory and receivables into cash when it matters most.
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