Asset-based lending, or ABL, is a secured loan where borrowing capacity depends on the value of specific assets, most often receivables and inventory, rather than projected EBITDA. Private credit ABL follows the same principle, but private funds, non-banks, and sponsor structures drive documentation and pricing. Think of it as a revolving line tied to assets you can liquidate quickly, not what you hope to earn next year.
This guide explains how ABLs are structured, how borrowing bases are built, and where the risks and market terms sit, so borrowers and sponsors can move from term sheet to live cash control with fewer surprises.
Why companies and lenders choose ABL
Borrowers use ABL to fund working capital, manage seasonal swings, bridge transitions, and unlock value that cash flow lenders do not credit fully. Because ABL availability scales with sales and collections, it steadies liquidity through cycles. That ratchet-like availability is particularly useful in lower-margin or volatile businesses.
Lenders prioritize strong collateral, perfected priority liens, cash dominion, and fast enforcement paths. They rely on collateral performance and reporting more than enterprise value. As a result, documentation focuses on eligibility tests, controls, and liquidation analysis rather than growth assumptions.
Sponsors favor ABL because it finances working capital externally, preserves term capacity for acquisitions or capex, and often includes springing covenants keyed to excess availability. When designed well, ABL can provide substantial headroom and flexible liquidity without over-restricting operations.
Core structure and variants that extend availability
The core structure centers on a borrowing base, a perfected first-priority security interest, rigorous cash control, and ongoing collateral testing. Together, those four features give lenders a tight grip and give borrowers reliable access with fewer incurrence covenants.
- Classic ABL: A revolving facility advanced against eligible accounts receivable and inventory.
- Stretch ABL and FILO: Junior or last-out tranches against the same collateral to increase availability, often in sponsor deals and reorganizations.
- Termed-out ABL: Term loans against machinery, equipment, or IP, with amortization tied to appraised value.
- Specialty finance ABL: Warehouse lines to originators secured by pools of loans, leases, or receivables, often through a bankruptcy-remote SPV.
- Adjacent structures: Factoring is a true sale of receivables with purchase-price mechanics; securitization is a true sale to an SPV with credit enhancement. By contrast, ABL is a secured loan to the operating company or a holding SPV, not a sale.
NAV loans are asset-based too, but they use different underwriting and documents focused on fund assets and partner commitments rather than operating collateral. For a comparison of fund-level products, see NAV facilities.
Jurisdictions and how security is perfected
In the United States, Article 9 all-asset security interests are standard. Perfection runs through UCC filings, control over deposit and securities accounts, and possession where needed. Intercreditor agreements set priority and standstills when a term loan also exists.
In Canada, PPSA regimes mirror many U.S. concepts, while Quebec uses civil-law hypothecs. In the United Kingdom, debentures combine fixed and floating charges. Receivables can sit under fixed charges via account control and notification, with drafting and monitoring central to crystallization and priority. Across continental Europe, receivables assignments are jurisdiction-specific, such as Dailly in France or assignment by way of security in Germany. Assignment limits and civil code rules can narrow eligibility and require local advice.
Bankruptcy remoteness varies by structure. ABL to operating companies is not ring-fenced. Warehouses and certain specialty finance lines use SPVs, independent directors, and non-petition covenants. True-sale opinions or perfected security interests plus cash dominion protect lenders depending on the asset and structure.
Collateral, advance rates, and the borrowing base
Accounts receivable drive the borrowing base. Eligibility screens out aged invoices, cross-aged buckets, affiliates, unsupported foreign obligors, government receivables without consents, and high-dilution credits. Concentration limits apply. Advance rates often sit at 80 to 90 percent of eligible AR, adjusted for dilution and credit quality, and dilution reserves generally equal recent dilution plus a buffer.
Inventory is advanced based on third-party appraisals of net orderly liquidation value, or NOLV. Ineligibles include obsolete, slow-moving, consigned, and inventory not owned. Advance rates typically run 50 to 70 percent of NOLV, and finished goods, WIP, and raw materials are modeled separately to reflect different recovery profiles.
Other assets can contribute. Equipment can be advanced against orderly or forced liquidation value with amortization. IP and software can support term components where valuation and enforcement are credible. In specialty finance, the collateral is a loan or lease pool with haircuts for delinquency and loss expectations.
Availability equals the sum of advances on eligible collateral less reserves. Reserves cover dilution, taxes, payroll liens, rent, appraisal and field exam costs, and seasonal or event-driven risks. Lenders can adjust reserves with reasonable notice as risks surface. Borrowers deliver borrowing base certificates weekly for stressed credits and monthly for stable ones. Field exams and appraisals test the data and recalibrate advance rates and reserves.
Consider this simplified example. Gross AR of 30 million has 10 percent ineligible, so eligible AR is 27 million at an 85 percent advance. Dilution of 3 percent yields a 0.81 million reserve. Inventory NOLV of 20 million at 60 percent advance equals 12 million. Add a 0.5 million unused line reserve and a 0.5 million tax reserve. Availability equals 0.85 × 27 plus 0.60 × 20 minus 0.81 minus 1.0, or 31.64 million. If 25 million is drawn, excess availability is 6.64 million.
Cash control and perfection that actually work
Deposit account control agreements, or DACAs, with depository banks establish control and specify turnover mechanics. Exclusive control is ideal, while springing control on default can work if timelines are tight. Lockboxes and blocked accounts capture remittances directly. Where operations require collections to pass through operating accounts, daily sweeps limit commingling risk. Collateral access agreements secure site entry, subordination of landlord liens, and rights to seize inventory and equipment. These agreements shorten enforcement timelines materially.
Priority, intercreditor, and bankruptcy playbooks
Split collateral structures are common. The ABL revolver takes priority on working capital, while term lenders take priority on fixed assets and equity. Intercreditors set standstills, turnover obligations, lien waterfalls, and sale mechanics. In blended structures, an ABL front line can pair with unitranche loans behind it. Agreements among lenders then allocate economics and control across first-out and last-out slices.
In Chapter 11, DIP ABL facilities can prime prepetition liens with consent or court order, fund operations, and rely on budgets with tight variance testing. Adequate protection often includes replacement liens and superpriority claims. For detailed priority concepts, see practical guidance on lien subordination.
Documentation checklist and sequencing
Documents track the collateral and control story. The credit agreement covers commitments, conditions, covenants, events of default, borrowing base definitions, eligibility, and reserves. Security agreements and collateral schedules attach specialized security for IP, aircraft, or railcars, and mortgages appear if real estate supports term components. An intercreditor between ABL and term lenders sets priority and remedies. DACAs and securities account control agreements perfect cash and marketable securities. Collateral access agreements with landlords, warehouses, processors, and bailees shorten recovery timelines. Appraisal and field exam engagement letters name the lender as client, with costs for the borrower. Borrowing base certificate templates tie back to the agreement.
Closing deliverables include searches and filings, good standings, officer certificates, legal opinions on enforceability and perfection, insurance endorsements naming the agent as loss payee, and payoff letters to release prior liens. UCC filings and control agreements should be sequenced ahead of funding to protect priority.
Economics, pricing, and fee stack
ABL revolvers price off SOFR with margins that reflect collateral quality, reporting cadence, and excess availability. Private credit ABL usually carries higher spreads than bank ABL, especially for last-out features and softer collateral. Undrawn fees apply to the unused portion, and letters of credit carry fronting and participation fees. Annual agency fees apply along with third-party exam and appraisal costs, and extraordinary review fees can apply for integrations or stressed credits. OID and upfront fees are more common on FILO and stretch tranches, and work fees cover diligence if the deal does not close.
Here is a simple illustration. A 75 million ABL at SOFR plus 375 bps, 37.5 bps unused, and a 150,000 agency fee. At 60 percent utilization and a 5.5 percent SOFR, interest runs 9.25 percent on 45 million, unused fees run 0.375 percent on 30 million, and you add fixed agency and periodic exam costs. When comparing alternatives, sponsors often benchmark these all-in costs against direct lending term loans and blended structures.
Accounting, reporting, and compliance essentials
For borrowers, drawn ABL is debt. Interest and fees follow the effective interest method. Collateral stays on the balance sheet because ABL is not a sale. If receivables are sold to an SPV, derecognition follows ASC 860 or IFRS 9 tests. Lenders that are banks carry ABL at amortized cost with current expected credit loss provisions, whereas investment funds mark to fair value with NAV-based adjustments.
Reporting cadence includes borrowing base certificates, AR and inventory agings, compliance certificates, and financial statements. Enhanced reports cover concentrations, dilutions, and exceptions. On the regulatory side, confirm KYC, AML, sanctions screening, and beneficial ownership. In the U.S., FinCEN BOI reporting now touches most operating companies. Private credit managers also consider Form PF and evolving private fund rules. Security and perfection programs should track filings, account controls, and carve-outs for PMSIs and consignments.
Key risks and how to mitigate them
- Data integrity: Weak ERPs and manual journals corrupt eligibility testing. Mitigate with tight field exams, clean data tapes, and certifications, backed by higher cadence in stressed cases.
- Dilution and offsets: Credit memos, rebates, and setoff reduce cash. Contracts with broad setoff or MFN pricing call for higher reserves or ineligibility.
- Anti-assignment: Government, healthcare, and defense receivables may need consents or special notices. Supply chain finance programs can complicate attribution.
- Inventory volatility: Seasonality and supply shifts hit NOLV. Appraise more frequently and tighten reserves until stability returns.
- Commingling: Partial DACAs and late sweeps let cash leak. Test dominion at onboarding and post close.
- Intercreditor friction: Term lenders may resist fixed-asset sales needed to manage cash. Clear standstills and sale mechanics reduce conflict.
Use cases and a realistic timeline
ABL fits manufacturers and distributors that need a working capital revolver to fund seasonal builds and vendor terms. It also supports transitions, such as carve-outs, where quick liquidity can stabilize systems, and turnarounds where collateral value supports DIP funding and business continuity during plan negotiations. Specialty finance warehouses fund originations with tight triggers and replacement servicer rights, and run at higher leverage against performing pools. For comparisons on factoring mechanics and dilution control, see this overview of receivables finance vs factoring.
Implementation runs on a predictable track. In weeks 0 to 1, execute an NDA and term sheet, screen collateral tapes, and map cash flows and deposit accounts. Weeks 1 to 4 focus on field exams and appraisals, drafting credit, security, and intercreditor documents, ordering UCC searches and payoff letters, and circulating DACAs and access agreements. Weeks 3 to 6 drive negotiations, finalize intercreditors, gather conditions precedent, finalize borrowing base templates, complete KYC, and issue insurance endorsements. Weeks 5 to 8 close and fund, file UCCs, activate DACAs, deliver the initial borrowing base, and track post-close items such as delayed access agreements or foreign filings.
Monitoring, enforcement, and cross-border realities
Field exams and appraisals scale with risk. Stable credits often see annual exams and semiannual appraisals; inventory-heavy or stressed profiles warrant quarterly exams and monthly appraisals. Operational covenants keep systems sound, including segregation of duties, approvals for credits and write-offs, and prompt flagging of disputes so reserves adjust quickly. Information rights include near-real-time bank data from controlled accounts, detailed agings, and exception logs.
On enforcement, lenders can notify account debtors to route payments to controlled accounts and quickly convert receivables to cash when contracts are clean. Setoff claims can slow recovery, so consistent application of ordinary-course terms helps. For inventory and equipment, outcomes depend on site access and cooperation from landlords and logistics providers. Pre-negotiated access agreements save time. Liquidation options include going-concern sales, auctions, or borrower retention under an agreed plan. Cross-border collateral requires local filings and advice, and many lenders limit foreign receivables to jurisdictions with predictable outcomes.
Market backdrop and a simple forecasting tip
The secured finance industry reports steady ABL performance in 2024, modest commitment shifts, and low net losses versus unsecured credit, helped by cash dominion and collateral controls. Private credit managers continue to deploy stretch ABL and FILO structures as banks retrench, and documentation has converged toward bank ABL controls while paying a spread premium for flexibility in sponsor deals. In mixed stacks, sponsors also consider security packages and guarantees, financial covenants, and second lien loans that sit around the ABL.
As a practical forecasting angle, build a simple weekly borrowing base model to anticipate reserves and springing tests. Use 13-week AR collections, map rebates and credits by customer to track dilution, and roll inventory NOLV by SKU family with seasonality overlays. Then apply a one-line rule of thumb: every 1 percent uptick in dilution or 10 percent drop in NOLV usually reduces availability more than the savings from a 25 bps margin cut. This makes the case for data hygiene improvements that pay back faster than spread negotiations.
Conclusion
Use ABL when collateral is high quality, reporting is reliable, and cash control can go live quickly. Confirm eligibility, dominion, and lien priority early, then draft eligibility, reserve, and intercreditor terms from real data, not templates. In the end, real availability comes from the borrowing base math, not the headline commitment.