What Is Asset-Based Lending?
Asset-based lending (ABL) is a form of financing where the loan is secured by specific business assets, typically accounts receivable, inventory, equipment, or a combination. The credit facility is structured around the value of those assets, with the borrowing base fluctuating as the underlying collateral changes.
ABL is most common among mid-market companies and fast-growing businesses that have outgrown conventional credit lines but have significant assets to collateralize.
How ABL Works
The lender establishes a borrowing base, a formula that calculates how much you can borrow based on the eligible collateral. A typical formula might advance 85% of eligible receivables and 50% of eligible inventory. As your receivables grow, your borrowing capacity grows. As you collect receivables, availability reduces.
The result is a revolving credit facility that scales with your business, unlike a fixed-amount term loan, an ABL facility grows as your balance sheet grows.
Types of Collateral
- Accounts receivable: The most common and most liquid, typically advanced at 80 to 90% of eligible invoices
- Inventory: Valued based on net orderly liquidation value, advances typically 40 to 60%
- Equipment: Net book value or forced liquidation value, lower advance rates
- Real estate: Sometimes included in larger facilities
Who Uses ABL
- Manufacturers and distributors with significant inventory and receivables
- Companies that have outgrown conventional bank credit lines
- Businesses with seasonal revenue spikes needing flexible liquidity
- Companies in turnaround situations with assets but stressed financials
- Private equity-backed businesses needing scalable acquisition financing
ABL vs Conventional Credit Lines
A conventional bank credit line is typically unsecured or lightly secured, sized based on your financial ratios and profitability. ABL is collateral-driven, the loan size is tied to asset values rather than earnings. This means ABL can provide significantly more liquidity for asset-heavy businesses, even when EBITDA is thin.
Minimum Size
Most institutional ABL lenders have minimum facility sizes of $1 to $5 million. Below that, accounts receivable factoring or a conventional line of credit is usually more appropriate.
Educational content only, not advice. KQT Advisors, LLC is a commercial loan broker; we are not a lender, attorney, accountant, financial advisor, or fiduciary. We do not originate loans or make lending decisions. The information in this article is provided strictly for general informational and educational purposes and reflects our understanding at the time of writing. It is not, and must not be construed as, financial, tax, legal, accounting, investment, or any other professional advice, and creates no advisor-client relationship. Loan programs, rates, terms, eligibility requirements, fees, and approval criteria are set by individual lenders, the SBA, and other parties and are subject to change at any time without notice. Examples are illustrative only and not guarantees of outcome. Nothing here is a commitment to lend, an offer of credit, or a representation that any specific structure will be available to or appropriate for any borrower. Always consult your own qualified financial, tax, and legal advisors before acting on any information in this article. To the maximum extent permitted by law, KQT Advisors, LLC and its principals, employees, agents, and affiliates disclaim all liability for any direct, indirect, consequential, or incidental loss or damage arising out of any use of, reliance on, or inability to use the information in this article.