Asset-based lending and the borrowing base

The full guide

Credit sized to what you own

With asset-based lending, the lender sizes your credit to what you own rather than to your profits. The FDIC's examination guidance describes asset-based loans as advances on a line of credit based on a borrowing base, a percentage of eligible receivables and inventory. One lender we track defines an asset-based loan as an advance secured by collateral such as equipment, inventory, receivables or other property.

Most asset-based credit is a revolving line. Some lenders also offer term versions: one we track publishes asset-based loans of $50,000 to $10 million over 6 to 36 months with fixed daily, weekly or monthly payments. Another publishes a real-estate-secured program of $50,000 to $1 million at rates from prime plus 2%, with a 50% maximum loan-to-value and a 690 minimum score.

The logic is recovery. Because the lender could collect your receivables or sell your inventory if the business failed, it can lend against assets a cash-flow lender would ignore, and it lends only a fraction of their value to leave room for losses in a sale.

SBA offers a version too. Its Working CAPLine is an asset-based revolving line of credit, made through SBA lenders, for businesses that cannot meet the standards for long-term credit.

How the borrowing base works

The lender sets an advance rate for each kind of asset. One lender we track describes typical advance rates of 70% to 90% on receivables and 40% to 60% on inventory. Only eligible assets count: invoices that are badly past due, goods that are obsolete or assets already pledged elsewhere are typically excluded.

That last line is the risk. The base moves with your sales, so availability can shrink just when cash is tight. Plan draws around the base you expect in your slowest month, not your busiest.

Reporting, field exams and lockboxes

The FDIC's guidance lists the tools lenders use: borrowing base certificates, collateral audits also known as field audits, lockbox collection of receivables and close monitoring of collateral values. In practice, you report your receivables and inventory on a set schedule, such as monthly, and the lender's examiners visit to test the numbers against your books.

Customer payments often go to a lockbox or an account the lender controls, and the money pays down the line before you draw again. Expect a lien covering the pledged assets, often a blanket lien on all business assets.

Ask whether the agreement also includes financial covenants, such as a minimum coverage ratio or limits on other borrowing, and what happens if you miss one. All of this takes staff time. If your bookkeeping cannot produce accurate aging and inventory reports on schedule, fix that before you apply.

Interest, exam fees and unused-line charges

Few lenders publish ABL pricing. One real-estate-secured program we track quotes rates from prime plus 2%. Another lender says only that rates and fees vary with asset liquidity, industry risk and structure. Interest runs on the drawn balance: carrying $300,000 for a month at 12% a year costs about $3,000.

The monitoring adds cost. Ask each lender for a full list of fees in writing, including field exam fees, unused line fees, collateral monitoring charges, and any early termination fee if you move the line elsewhere. Then compare the total with a line of credit or factoring for the same need. The loan calculator handles the interest math.

Fixed charges hit hardest when you use little of the line. Suppose, for example, monitoring and other fixed fees come to $1,000 a month. On an average balance of $300,000, that adds 4 percentage points a year to your cost. On an average balance of $100,000, it adds 12. Size the facility to what you will actually use.

Clean books before the field exam

• Aging reports that tie out. Your receivables aging should match your general ledger and your customers' records.
• Resolved disputes. Old credits, short payments and disputed invoices reduce what counts as eligible.
• Accurate inventory. A recent physical count, by item and location, with slow and obsolete stock identified.
• Current financials. Recent statements and tax returns, plus a list of existing liens and debts.
• Time for the field exam. Expect examiners to review your books on site before the line opens and periodically after.

If a prior lender has a lien on your receivables or inventory, it must be paid off or released before a new asset-based lender can take first position. Our documents checklist covers the basics.

When your balance sheet beats your profits

A manufacturer carrying 60 days of receivables and a warehouse of finished goods, or a distributor growing faster than its cash, can often borrow more against those assets than a cash-flow lender would offer. One lender we track says it focuses on collateral value rather than credit scores. Our manufacturing funding page covers the trade's typical cycle.

It also suits businesses whose value sits in equipment or property. A lender can advance against machinery or real estate as a term loan, while a revolving line follows receivables and inventory. The trade-off is sensitivity: when sales fall, receivables fall, and so does what you can borrow.

Smaller or simpler needs may fit other products better. If you mainly need cash for specific slow-paying invoices, invoice factoring skips the borrowing base reporting. If the need is a single order, purchase order financing may fit. Openbook Capital matches your file to lenders whose published criteria fit, names each before submitting, and lays out every offer's rate, fees and reporting requirements side by side.

Pros and cons