In This Article
What Is Asset-Based Lending?
Asset-based lending (ABL) is a financing structure where the loan amount and terms are determined primarily by the value of your business assets rather than your credit score or cash flow alone. Eligible assets include accounts receivable, inventory, equipment, and real estate. ABL facilities can be structured as revolving lines of credit or term loans, and they're designed to grow with your business — as your asset base increases, your borrowing capacity increases.
How Asset Valuations Work
Each asset type has different "advance rates" — the percentage of asset value a lender will lend against. Accounts receivable typically get 80-90% advance rates (the highest, because they're the most liquid). Inventory advances range from 50-70% depending on type and marketability. Equipment is valued at 50-80% of orderly liquidation value (OLV) or fair market value (FMV). Real estate can see advances of 50-75% of appraised value. Your total borrowing capacity is the sum of all eligible asset advances.
ABL vs. Traditional Lending
Traditional lending focuses on cash flow, credit scores, and financial ratios. ABL focuses on asset values. This makes ABL ideal for businesses that are asset-rich but may have inconsistent cash flow, lower credit scores, or are in turnaround situations. ABL is also preferred for high-growth companies whose rapid expansion outpaces their cash flow — a common situation in trucking, distribution, and manufacturing.
The ABL Monitoring Process
ABL lenders actively monitor your assets through regular reporting (often monthly borrowing base certificates), periodic field exams, and ongoing appraisals. This monitoring is the trade-off for the flexibility ABL provides. Most ABL facilities require you to submit aging reports on receivables, inventory reports, and equipment schedules. While this requires more administrative effort than a traditional loan, it's what allows ABL lenders to offer higher limits and more flexible structures.
Pros & Cons
Pros
- Higher borrowing limits than unsecured options
- Credit score is less important than asset value
- Grows with your business as assets increase
- Flexible structure (revolving or term)
- Works for turnaround and high-growth situations
Cons
- Requires regular reporting and monitoring
- Periodic field exams can be disruptive
- More complex than simple term loans
- Advance rates limit actual borrowing
- May have higher fees than traditional loans
Key Terms to Know
Best For
- Asset-rich businesses with cash flow challenges
- High-growth companies needing flexible capital
- Turnaround situations where traditional lenders decline
- Businesses with strong receivables or inventory
Asset-Based Lending (ABL) vs. Equipment Leasing vs. Financing
How do these two options compare?
ABL uses all your business assets (receivables, inventory, equipment) as collateral for flexible revolving credit. Equipment financing or leasing focuses on a single asset purchase. ABL facilities start at $500K+ and offer more flexibility but require ongoing reporting. Equipment loans are simpler and available at lower amounts. Choose ABL for large, flexible needs; equipment financing for specific purchases.
Read about Equipment Leasing vs. Financing