Asset-backed lending (ABL) is a financing structure where the loan is secured by specific business assets — accounts receivable, inventory, equipment, or real estate — with the borrowing availability tied to a percentage of those assets' value.
In ABL, the lender establishes a 'borrowing base' — the maximum you can borrow — as a percentage of pledged asset value. Advance rates vary by asset type: accounts receivable typically 70-85% of eligible AR, inventory 40-60%, equipment 70-80% of appraised value, real estate up to 75% LTV. As asset values change (AR is collected, inventory turns), the borrowing base fluctuates. ABL is particularly well-suited for businesses that have significant balance-sheet assets but limited profitability or cash flow. A manufacturer with $2M in receivables and $1M in inventory might qualify for a $1.5M revolving credit facility even if its net income doesn't support that level of cash-flow-based underwriting. This makes ABL a common tool for turnarounds, seasonal businesses, and rapidly growing companies where assets outpace earnings. Lenders offering ABL typically require rigorous reporting: monthly (or more frequent) borrowing base certificates, audit rights, and monitoring of collateral quality. Eligible AR excludes old invoices (usually >90 days), disputed invoices, and receivables from concentrated customers above a threshold. This ongoing monitoring is why ABL facilities typically require more operational overhead than term loans. ABL is available from commercial banks (often for larger borrowers), specialty finance companies, and asset-based lenders. It's distinct from invoice factoring (which sells AR outright) and from cash-flow-based lending (underwritten on DSCR/EBITDA rather than collateral).
A traditional term loan has a fixed advance amount underwritten on cash flow (DSCR/EBITDA). ABL is typically a revolving facility where availability fluctuates with the collateral base. ABL is collateral-driven; term loans are cash-flow-driven. ABL requires ongoing borrowing base monitoring; term loans typically don't.
Accounts receivable (most liquid, highest advance rates), inventory (depends on type and marketability), equipment (machinery, vehicles, specialized equipment), and commercial real estate. Not all assets within a category qualify — old AR, slow-moving inventory, and highly specialized equipment may be excluded or receive lower advance rates.
Historically yes, but specialty lenders now offer ABL to smaller businesses. Invoice financing and equipment loans are essentially asset-backed products accessible to businesses with $500K+ in annual revenue. Formal revolving ABL facilities typically require $5M+ in eligible assets, though minimums vary by lender.
A borrowing base certificate is a periodic report the borrower submits to the lender showing the current value of pledged assets and the resulting maximum borrowing availability. Lenders typically require these monthly or weekly. Inaccurate certificates are a default trigger — borrowers must maintain accurate AR aging reports and inventory counts.