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.
ABL comes with reporting requirements. Lenders require regular borrowing base certificates, field exams, and collateral audits. The administrative burden is higher than a conventional line, but for companies that need the liquidity, the trade-off is worth it.
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.
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Talk to KQT AdvisorsKQT Advisors is a commercial loan broker and does not make lending decisions. All loan approvals, rates, and terms are subject to lender underwriting. Information in this article is for general informational purposes only.
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