About Asset-Based Lending
In short, Asset-Based Lending (ABL) is any kind of borrowing secured by a company’s assets. ABL lenders consider the quality of the collateral rather than the credit history or ratings of the borrower. Accounts receivable, inventory and equipment can act as collateral for the borrower. Asset-Based Loans provide fully secured credit to companies that are highly leveraged, have irregular earnings, or marginal cash flow. Such loans allow a company to monetize assets on the balance sheet and provide it with working capital. ABL is often chosen not only by troubled companies which require a quick turnaround, recapitalization, and debtor-in-possession (DIP) financing, but also by well established companies looking for greater flexibility in implementing strategic plans.
A revolving line of credit is a line of credit provided by the lender to a maximum amount. Manufacturers, distributors, wholesalers and retailers often use revolving line of credit as their financing option for securing credit through their account receivables and inventory. Revolving ABL facilities are primarily repaid using the collateral already converted into cash for that business cycle. Loan advances depend on the eligible collateral (the “borrowing base”). One of the essential features of ABL is being able to maintain strong control and a close monitoring of the facility.
Terms and Definitions
- Accounts payable
A current liability representing the amount owed to a vendor/supplier by an individual or a business for merchandise or services purchased on open account or short-term credit.
- Accounts receivable
A current asset representing money owed to a business for merchandise or services bought on open account. Accounts receivable is the notice of required payment, as per agreement, for said goods or services.
A drawdown or disbursement of funds according to the terms of an existing loan agreement. Advances are common to revolving credit facilities. The term can also refer to a customer paying of a loan before the agreed upon date.
- Advance rate
The maximum amount advanced against the collateral provided. The advance rate varies according to the actual collateral, specific terms, age and, possibly, the financial strength of the obligated party.
- Borrowing base
A collateral base agreed upon by the borrower and lender limiting the amount of funds the lender advances the borrower. The borrowing base formula specifies the maximum amount that may be borrowed in terms of collateral type, eligibility, and advance rates.
A legal right to control or to enforce a charge against another’s property until a legal claim has been paid or otherwise resolved.
The amount remaining on an invoice in excess of the advance.