Asset-Based Lending

What is asset-based lending?

Asset-based lending provides a facility secured against a combination of business assets such as receivables, stock, plant and machinery and property. The lender applies an advance rate to each class of asset and adds the results together to produce the total facility, usually a revolving element against receivables and stock plus term loans against fixed assets.

Asset-based finance is sometimes used as a wider label that includes invoice finance and asset finance on their own. Asset based lending, or ABL, normally means the combined, multi-asset facility described here, aimed at businesses with turnover in the millions.

How it differs from a secured loan and from invoice finance

A secured business loan takes a fixed sum against one asset, usually property, and repays it over a set term. An ABL facility flexes: as debtors and stock rise, so does borrowing capacity.

Invoice finance funds receivables only. ABL starts with receivables but adds stock, plant and sometimes property, which can release considerably more cash for an asset-heavy business. The price is more monitoring, since stock and plant are harder to value than invoices.

The borrowing base

The borrowing base is the calculation at the centre of every ABL facility. For each asset class the lender sets an advance rate, the percentage of value it will lend against. Illustrative ranges:

• Receivables: 70 to 90 per cent of eligible invoices, excluding those over 90 days, disputed or owed by connected parties.
• Finished stock: 30 to 70 per cent of cost or net orderly liquidation value, depending on how readily it could be sold.
• Raw materials and work in progress: often much lower, sometimes excluded altogether.
• Plant and machinery: a percentage of a forced-sale valuation carried out by an independent valuer.
• Property: a loan-to-value against a professional valuation, typically as a separate term loan.

The business submits a borrowing base certificate, often monthly, and the lender recalculates availability. If the business has drawn more than the new figure allows, the difference must be repaid. These percentages are illustrative only.

Who uses asset-based lending?

Manufacturing, wholesale and distribution businesses are the natural users, because they carry large debtor books and significant stock and equipment. ABL also suits businesses in transition: a company acquiring a competitor, a management team buying out the owner, a group refinancing bank debt, or a business recovering from a difficult period with a sound asset base. See our manufacturing page. It is a poor fit for service businesses with few tangible assets, for cash or card retailers, and for businesses too small to absorb the monitoring costs.

How a facility is structured

A typical structure has two layers. The revolving element is secured on receivables and stock and works like a flexible overdraft. The term element is secured on plant, machinery and property, with a fixed repayment schedule over several years. The lender normally takes a debenture over all the company's assets, with fixed charges over property and plant and a floating charge over the rest. Existing lenders holding charges must be repaid or agree to rank behind the ABL provider.

Refinancing, restructuring and buy-outs

ABL is commonly used to replace an existing bank facility where the bank has become cautious. Because it is sized on assets rather than profits, a business with a weak year but strong debtors and stock can sometimes raise more through ABL than a conventional loan. The same logic makes it a tool for business debt restructuring, where the proceeds settle several existing creditors and leave the business with one lender and a clearer structure.

In a management buy-out, the acquiring team uses the target's own assets to fund part of the purchase price. The lender advances against the assets on completion, with the balance from the team's equity and deferred payments to the seller. Day-one borrowing should leave headroom for normal trading.

Eligibility

Lenders look for an established limited company or LLP with reliable accounts, a diverse debtor book, stock that can be independently valued, and systems that produce accurate monthly reports. Minimum facility sizes are usually in the hundreds of thousands of pounds. Directors' guarantees may be requested, often limited given the security taken. As the borrowers are companies, these agreements fall outside consumer credit regulation.

Documents usually needed

• Three years of filed accounts and current management accounts
• Aged debtor and creditor ledgers with customer concentration analysis
• A detailed stock listing by category, location and age
• A fixed asset register and any existing valuations
• A twelve-month cash-flow forecast and a note of existing charges and borrowing

What does asset-based lending cost?

Interest on the revolving element is usually a margin over base rate on the daily drawn balance. Term loans carry their own rate. On top of interest, expect an arrangement fee, an annual facility fee, a non-utilisation fee on undrawn availability, and monitoring or audit fees for the lender's field examinations, often quarterly. Valuation fees are paid upfront. Any introducer or broker fee must be disclosed before you commit.

The all-in cost can be competitive for a business that uses the facility fully, and expensive for one that draws little but still pays the fixed fees.

Covenants and reporting

Covenants are promises in the loan agreement. ABL facilities carry fewer profit-based covenants than conventional loans, because the lender relies on the assets, but they usually include minimum availability tests, limits on dividends and further borrowing, and strict reporting. The business must deliver certificates, ledgers, stock reports and management accounts on time, and permit audit visits. A missed report or breached test can trigger a reduced advance rate, a higher margin or a demand for repayment.

Benefits and drawbacks

Alternatives to consider

• Invoice finance alone, where receivables are the main asset and stock is modest.
• A secured business loan against property, where a fixed sum over a fixed term is sufficient.
• Working capital finance for smaller businesses below ABL minimums.
• Business debt refinancing of an existing facility without taking on a multi-asset structure.
• Free, impartial advice from Business Debtline for smaller businesses in difficulty.

Frequently asked questions