Asset-Based Loans: A Practical Guide

Introduction

Asset-based loans are a form of business financing secured by a company’s assets. They are commonly used by growing businesses that need working capital but want to avoid large fixed-term debt or equity dilution. This guide covers what asset-based loans are, how they work, who uses them, and what to consider when evaluating lenders.

What is an asset-based loan?

An asset-based loan (ABL) is a loan or revolving line of credit secured by assets such as accounts receivable, inventory, equipment, and sometimes real estate. The amount lenders will advance depends on the value and quality of those assets. ABLs are popular for firms with strong asset bases but variable cash flow, seasonal needs, or rapid growth.

How asset-based loans work

When a company applies for an ABL, the lender assesses eligible collateral and sets a borrowing base, which caps how much can be drawn. The borrowing base is usually expressed as a percentage of the asset value. Common advance rates include roughly 70–90% for receivables and 20–60% for inventory, but actual rates vary by lender and asset quality. Many ABLs are revolving facilities, with ongoing reporting requirements such as borrowing base certificates. Interest rates are typically variable, tied to a base rate plus a margin. There may also be fees for setup, ongoing audits, and utilization. As assets grow or are collected, the facility can be drawn down; as assets decline, borrowing capacity shrinks.

Common assets used as collateral

• Accounts receivable (invoices owed by customers)
• Inventory (goods held for sale)
• Equipment and machinery
• Real estate in some cases
• Other assets such as IP or contracts (less common and currency dependent)

Borrowing base and covenants

Borrowing base represents the value of eligible collateral used to calculate the loan limit. Advance rates are applied to each asset category, and total availability depends on the combined base. Lenders often impose covenants such as minimum liquidity, debt service coverage, and quarterly reporting. Regular updates (for example, monthly borrowing base certificates) help the lender monitor asset quality and risk.

Fees and costs

Typical costs include a facility or commitment fee, a utilization fee when the line is drawn, and an interest rate margin. There may be closing costs, ongoing audit charges, and potential fees for field examinations. The all-in cost depends on asset mix, collateral quality, and covenant burden.

Who uses asset-based loans?

ABL facilities are common among manufacturers, distributors, and service companies with substantial receivables or inventory. They are also used by growing firms pursuing acquisitions, expansions, or restructurings who seek flexible liquidity tied to their asset base rather than fixed-term debt. Startups with asset-rich balance sheets or companies undergoing seasonal cycles may find ABLs appealing.

Pros and cons

• Pros:
• Flexible liquidity that scales with asset value
• Non-dilutive financing and often quicker access than some term loans
• Can support growth, working capital, and seasonal needs
• Cons:
• Ongoing asset monitoring and reporting requirements
• Collateralization of assets can limit operational flexibility
• Costs can be higher than some unsecured or term loans, and rates vary with asset quality
• Covenant pressure and potential collateral sweeps if performance dips

Risks and considerations

• Asset value volatility can tighten borrowing capacity
• Concentration risk if a large portion of collateral comes from a few customers or asset types
• Tight covenants can require disciplined financial management
• Cross-default risk if other debts exist or if collateral is downgraded

How to compare lenders

• Eligible assets and advance rates by asset category
• Borrowing base calculation method and reporting requirements
• Fees (setup, commitment, utilization) and overall cost of capital
• Recourse versus non-recourse terms and backup covenants
• Frequency and scope of asset audits or field examinations
• Tenor, renewal terms, and flexibility to grow with your business

Example scenario

Company A has $2 million in eligible accounts receivable and $1 million in eligible inventory. The lender offers 85% advance on receivables and 50% on inventory. The resulting borrowing base could allow approximately $1.7 million from receivables and $0.5 million from inventory, totaling about $2.2 million of available credit. If the company draws $1.5 million and later collects more receivables, the capacity can increase; if collections slow or asset quality declines, available borrowing can shrink. Interest is charged at a base rate plus a margin, with additional utilization fees when the line is drawn heavily.

Alternatives to asset-based lending

• Traditional secured term loans from banks
• Lines of credit secured by other collateral or unsecured lines
• Invoice factoring, which advances on receivables and may involve selling invoices to a third party
• Merchant cash advances or other non-dilutive financing options
• Equity financing or convertible debt for larger capital needs