Asset-based lending and finance

What is asset-based lending?

Asset-based lending, often shortened to ABL, is finance secured against assets owned or controlled by a business.

A facility can combine invoice finance with lending against inventory, plant, machinery or property, giving the lender a broader security package than a standalone unsecured loan.

The available amount is linked to eligible asset values. It can increase as receivables or stock grow and fall when invoices are paid, become overdue or fail eligibility tests.

This makes the borrowing base and reporting rules central to day-to-day liquidity.

Assets that may support a facility

Trade receivables are commonly used because they convert to cash through customer payment. Lenders may exclude old debts, disputed invoices, overseas customers or high concentrations with one buyer.

Inventory can be supported at a lower percentage because stock may be harder to value and sell.

Plant, machinery and property require valuation and suitable ownership. Specialist, leased, obsolete or already-charged assets may have limited lending value.

The legal charge and priority against other lenders must be clear.

• Trade receivables and invoices
• Finished goods and qualifying inventory
• Plant, machinery and equipment
• Commercial property in suitable facilities

Advance rates and the borrowing base

The advance rate is the percentage of an eligible asset value the lender is prepared to make available. A headline percentage is not the same as usable cash because reserves, concentration limits, exclusions and existing drawings reduce availability.

Ask for worked examples based on your debtor book and stock profile. Model what happens if a major customer pays late, invoices become ineligible or inventory values fall.

Fees, recourse and operational control

Costs can include interest, service, audit, valuation, legal, arrangement, renewal and minimum-usage fees. Invoice facilities may be disclosed or confidential, and can involve recourse to the business if the customer does not pay.

The lender may require frequent reporting, debtor verification, field audits and control over collections. Assess staff time, customer communication and systems integration as part of the cost.

Advantages and risks of ABL

ABL can provide more headroom than a cash-flow loan where the business has strong assets but uneven profit. Availability can scale with sales and support acquisitions, turnaround, working capital or refinancing.

The risks are fluctuating availability, extensive security, covenant breaches, monitoring burden and possible disruption if the facility is terminated. A growing debtor book can also hide poor cash collection or excessive customer concentration.

How to compare asset-based lenders

Compare usable availability under the same asset data, not just facility size. Review advance rates, reserves, concentration limits, recourse, audit frequency, all fees, notice, minimum term and termination costs.

Take legal advice on debentures, guarantees and priority arrangements. Confirm the lender's experience in your sector and what support is available when an asset becomes ineligible or a customer disputes an invoice.