Asset-Based Lending Rates

Worked Example: Effective Annual Cost

Consider a hypothetical $2,000,000 revolver with these terms:

• Average balance drawn: $1,000,000

• Interest rate: 9 percent, so $90,000 a year

• Unused line fee: 0.25 percent on the $1,000,000 left undrawn, so $2,500 a year

• Field exams: four a year at $4,000 each, so $16,000

Total annual cost is $108,500. Divided by the $1,000,000 average balance, the effective cost is 10.85 percent, nearly two points above the stated interest rate. If the company only averaged $500,000 drawn, interest would fall to $45,000, the unused fee would rise to $3,750, and with the same $16,000 in exams the total would be $64,750, an effective 12.95 percent. Fixed fees hit harder when usage is low.

These numbers are illustrative only. Your lender's actual rate and fees will depend on your business and the market at the time.

Ways to Lower What You Pay

• Size the commitment to real needs so you are not paying unused fees on capacity you never draw.

• Clean up ineligibles by collecting old invoices and clearing slow-moving inventory, which raises availability without new fees.

• Negotiate caps on field exam frequency and costs, especially while availability stays above a set level.

• Ask for a pricing grid that rewards stronger performance with lower spreads.

• Negotiate a step-down in the early termination fee so refinancing gets cheaper over time.

• Get competing proposals from at least two lender types.

Frequently Asked Questions

Are asset based lending rates fixed or variable?
Mostly variable. The rate is tied to a benchmark plus a spread, so it moves when the benchmark moves. Some term loans inside a larger facility can be fixed or hedged.

Why do these facilities cost more than a standard bank loan?
Mainly because of the work involved. Frequent reporting, field exams and collections controls cost money, and lenders in this market often serve borrowers with more risk. Bank regulators note that interest rates and fees on these facilities are generally higher than other commercial lending.

Can my rate change during the term?
Yes. Benchmark changes flow through automatically, and grid pricing or default provisions can change the spread as well.

Compare Total Cost Before You Commit

The right facility is the one with the lowest total cost for how you will actually use it. Gather proposals, convert each one to an effective annual cost at your expected usage, and weigh asset based lending rates alongside reporting demands, flexibility and exit terms.

Asset based lending rates are rarely a single number. The interest rate is usually a floating spread over a benchmark, and it comes bundled with fees for setup, unused availability, collateral monitoring, field exams and appraisals. To compare offers, you need to add all of those together and look at what the facility costs per year on the money you actually use.

This page breaks down how lenders price these facilities, which fees to expect, what pushes your cost up or down, and how to calculate an effective annual cost. It does not quote current market rates, since those change with benchmark moves and differ by lender.

How the Interest Rate Is Built

Most collateral-based revolvers charge a variable rate made of two parts:

• The benchmark. Typically the prime rate or the Secured Overnight Financing Rate (SOFR). Both tend to move with Federal Reserve policy, and your rate changes when they do.

• The spread. A margin added on top of the benchmark that reflects the lender's view of your risk, the collateral and the size of the deal.

Many agreements use grid pricing, where the spread steps up or down based on measures such as average excess availability or leverage. The OCC's examiner handbook notes that pricing triggers can also include delinquency, high dilution, covenant violations and over-advances. A higher default rate usually applies if you breach the agreement.

Interest is normally charged only on the outstanding balance. Lenders often add interest and fees to the revolver balance instead of billing you separately, a long-standing practice in this type of lending.

Fees on Top of Interest

• Closing or commitment fee: a one-time charge, usually a percentage of the total commitment.

• Unused line fee: a charge on the part of the commitment you do not draw, which compensates the lender for keeping it available.

• Collateral monitoring or servicing fee: a monthly or annual charge for reviewing your reports.

• Field exam fees: per-day or per-exam charges, plus travel costs, for audits of your books and collateral.

• Appraisal fees: paid to third-party appraisers for inventory, equipment or real estate valuations.

• Lockbox and cash management charges for the collections account.

• Legal and documentation costs, usually the lender's counsel, paid by the borrower at closing.

• Early termination fee: a charge if you pay off and close the facility before a set date, often stepping down over time.

What Pushes Your Cost Up or Down

• Collateral mix. Receivables from strong business customers are cheaper to finance than inventory, and inventory is cheaper than specialized equipment or intangibles.

• Deal size. Fixed costs such as exams and legal work weigh more heavily on small facilities, so smaller lines tend to carry higher effective rates.

• Financial condition. Losses, high leverage or recent covenant breaches raise the spread and often move you to a costlier lender type.

• Collateral quality. High dilution, customer concentration, slow-moving stock or multiple storage locations add risk and reserves.

• Reporting quality. Accurate, timely reports and clean field exams make a lender more comfortable and can support better terms at renewal.

• Lender type. Bank collateral-based groups generally price below non-bank lenders, and factoring usually costs more than either for the same dollars.

Bank, Non-Bank and Factoring Pricing Compared

Banks usually offer the lowest spreads, but they expect profitable or near-profitable borrowers with reliable systems. Non-bank lenders charge more and may add minimum interest charges, yet they will finance situations banks avoid. Factors generally price as a discount fee per period, such as a percentage of the invoice for each 30 days it remains unpaid, instead of an annual rate. Converting that fee to an annual figure is the only way to compare it fairly with a line of credit.