Asset-Based Lending

Costs, Benefits and Trade-Offs

Pricing is usually a floating rate set as a spread over a benchmark such as the prime rate or SOFR, plus fees. Expect some combination of a closing fee, an unused line fee, collateral monitoring charges, and the cost of field exams and appraisals, which lenders generally pass on to the borrower. Spreads and fees vary with deal size, collateral quality and lender type, so compare total cost rather than the headline rate.

Benefits:

• Credit that grows with you. As receivables and inventory rise, so does availability.

• Lighter covenants. Many facilities rely on an excess availability test or a springing fixed charge coverage ratio instead of a full covenant package.

• Access when earnings are weak. Strong collateral can carry a company through a loss year or a restructuring.

Trade-offs:

• Higher cost and more paperwork than a conventional bank line for a borrower with strong cash flow.

• Lender control. Loan agreements typically let the lender take over cash collections or act on collateral faster if the collateral no longer supports the balance.

• Availability can shrink quickly when sales drop, customers pay late or inventory ages.

Getting Ready to Apply

Lenders move faster when the collateral data is clean. Before you apply, gather:

• Receivable and payable agings, by customer and by days outstanding

• An inventory listing by location, category and age, valued at cost

• Recent annual financial statements plus current interim statements

• A 13-week cash flow forecast if liquidity is tight

• A schedule of existing debt, liens and any unpaid taxes

• A customer list showing concentrations and payment history

Expect the lender to test your accounting system during the first field exam. Businesses with a perpetual inventory system, reconciled agings and timely month-end closes tend to see fewer reserves and smoother audits.

Related Guides in This Section

Each of these topics has its own page in this section:

• Accounts Receivable Financing: borrowing against unpaid customer invoices.

• Invoice Factoring: selling invoices for an upfront advance, and how that compares with invoice financing.

• Asset-Based Lenders: the types of lenders in this market and how to compare them.

• Asset-Based Lending Rates: how interest and fees are built and what moves them.

• Borrowing Base Explained: the formula behind your availability.

• Borrowing Base Certificate: the report you file to draw on the line.

• Debtor-in-Possession Financing: collateral-based credit for companies in Chapter 11.

Frequently Asked Questions

Is this kind of financing only for struggling companies?
No. Troubled companies do rely on it for turnarounds and recapitalizations, but healthy companies use it too, mainly for the flexibility of a line that grows with sales and carries fewer financial covenants.

How much can I borrow with an asset-based loan?
It depends on how much eligible collateral you have and the advance rate on each type. Receivables usually support more borrowing per dollar than inventory, and equipment or real estate add a smaller amount. Many lenders also set a minimum facility size, so ask early.

How long does it take to close?
Usually weeks rather than days. The lender has to complete a field exam, and an appraisal if inventory or equipment is pledged, before the first advance. Clean records shorten the process.

What happens if the collateral falls below the loan balance?
The line is over-advanced and you generally have to repay the shortfall quickly. Depending on the agreement, the lender may also add reserves, tighten reporting or start applying all collections directly to the loan.

Explore Financing Options for Your Business

If your receivables, inventory or equipment hold more value than your current credit line reflects, a collateral-based facility may give you more room to operate. Pull together your agings and financial statements, compare offers on total cost and reporting burden, and choose the structure that fits how cash moves through your business.

Asset-based lending is business credit secured by assets the company already owns, most often accounts receivable and inventory, and sometimes equipment, real estate or intellectual property. The lender sizes the loan to the value of that collateral instead of relying mainly on profits or projections, so the amount you can borrow rises and falls with the assets on your balance sheet.

Companies use this kind of financing to fund growth, cover seasonal swings, replace more restrictive debt, or keep operating through a turnaround. This guide covers how it works, which assets qualify, what it costs, and how to get ready to apply.

What Is Asset-Based Lending?

An asset-based loan is a loan or revolving line of credit where the main source of repayment is the conversion of pledged assets into cash. Receivables get collected, inventory gets sold, and the proceeds pay down the balance. The Office of the Comptroller of the Currency (OCC), which supervises national banks, describes it as a specialized product that provides fully collateralized credit to borrowers that may have high leverage, uneven earnings or marginal cash flow.

That is the key difference from cash flow lending. A conventional bank term loan is underwritten on earnings, debt service coverage and leverage, and it usually carries a full set of financial covenants. A collateral-based facility leans on the assets instead. It typically has fewer financial covenants, but it comes with closer oversight of the collateral: regular reporting, periodic field exams and lender control over collections.

The amount available at any moment is set by a borrowing base, a formula that applies advance rates to eligible collateral. As a hypothetical example, if a company has $800,000 of eligible receivables and the lender advances 80 percent, those receivables support up to $640,000 of borrowing.

Collateral That Qualifies

Lenders favor assets that are easy to value and quick to turn into cash. Roughly in order of preference:

• Accounts receivable. Business-to-business invoices owed by creditworthy customers are the core of most facilities. The OCC's examiner handbook cites common advance rates of 70 to 85 percent of eligible receivables, with some banks going up to 90 percent on business-to-business accounts.

• Inventory. Finished goods and commodity-type raw materials are easier to sell than work in process, which is often excluded. The same handbook says a bank typically advances up to 65 percent of the book value of eligible inventory, or 80 percent of its net orderly liquidation value (NOLV).

• Machinery and equipment. Usually advanced against an appraised liquidation value, often as a term loan that sits alongside the revolving line.

• Real estate. Owner-occupied property can be added to some facilities, though lenders generally limit less liquid assets to a small share of total availability.

• Intellectual property. Patents, trademarks and brand names support credit in some deals, usually with lenders that have experience valuing them.

Not every asset counts. Badly past-due invoices, receivables owed by affiliates, consigned goods and obsolete stock are commonly marked ineligible and left out of the calculation.

How the Facility Works Day to Day

1. Setup. The lender perfects its security interest under Article 9 of the Uniform Commercial Code (UCC), usually by filing a UCC-1 financing statement. It also runs lien searches, completes an initial field exam and, where inventory is pledged, orders an appraisal.

2. Reporting. You submit a borrowing base certificate with receivable agings and inventory reports. Monthly or weekly filing is common, and higher-risk borrowers may report daily.

3. Draws. You borrow as needed, up to the lesser of the borrowing base or the total commitment.

4. Collections. Customers pay into a lockbox or a deposit account the lender controls. Under full cash dominion, receipts go straight to the loan balance. Under springing dominion, cash flows to you unless availability falls below a set level or another trigger in the agreement is hit.

5. Ongoing checks. Field exams are often quarterly, and the lender can adjust reserves or eligibility as collateral quality changes.

The revolver is the most common structure. Some facilities add a term loan secured by equipment or real estate, and some allow a short, preapproved seasonal over-advance above the formula during a planned inventory build.

Businesses That Use It

• Distributors and wholesalers with large receivable and inventory balances relative to their profit.

• Manufacturers that buy raw materials months before they are paid for finished goods.

• Seasonal companies that build stock ahead of a peak and pay the line down afterward.

• Fast-growing firms whose receivables grow faster than retained earnings can fund them.

• Companies in transition, such as those coming off a loss year, replacing a lender that wants out, closing an acquisition, or reorganizing under Chapter 11.

Service businesses with strong business-to-business receivables, such as staffing firms and freight carriers, also qualify. Smaller ones often start with a receivables-only line or with factoring before moving to a full facility.