Structure
Asset-based lending (ABL)
Asset-based lending sizes a facility off the assets rather than off a multiple of earnings. Availability flexes with the collateral, which suits a business whose balance sheet is bigger than its profit suggests.
Also called ABL · borrowing base facility · asset based finance · collateral-based lending · cash flow vs asset based lending · ABL vs term loan
The debtor book carries the highest advance rate because it is the cleanest collateral: short-dated, self-liquidating and readily valued.
| Asset class | Relative advance rate |
|---|---|
| Property | 5–30 on the scale |
| Plant and machinery | 20–45 on the scale |
| Stock | 38–62 on the scale |
| Trade receivables | 80-90% of the eligible book |
Asset classes ranked by advance rate. Only the receivables rate is published, at typically 80 to 90% of the eligible book; the guides give stock as a lower percentage tranche and plant and property as valued and advanced against, without numbers, so none is asserted here.
How the facility is built
From a borrowing base: the sum of the assets the lender will advance against, each at its own rate.
The largest line is almost always the debtor book. The lender advances a percentage of your eligible receivables, typically 80 to 90% of the book, releasing cash against invoices you have raised but not yet collected. Trade receivables carry the highest advance rate because they are the cleanest collateral a lender has: short-dated, self-liquidating and readily valued.
On top of that sit tranches against other assets: a lower percentage of stock, and, where the business owns them, a valuation-based advance against plant and machinery and against property. Add the lines together and you have one facility drawing from several asset classes at once.
The word eligible is carrying weight in all of this, and it is where the negotiation happens rather than in the headline advance rate.
Why availability flexes
Because the base is re-measured rather than fixed, and that is the defining difference from a term loan.
A cash-flow term loan is a fixed sum that amortises to zero on a schedule. An ABL line rises and falls with the collateral behind it. Win a large contract and ship it, and the invoices raised lift your availability within weeks. Let the debtor book run down over a quiet quarter, or clear stock without replacing it, and the base falls with it.
That symmetry is the trade. The facility grows with the business without a renegotiation, and it also contracts without one. A borrower who plans on the peak availability rather than the trough is planning on the wrong number.
After a difficult year, three times a halved EBITDA halves the loan. The collateral does not halve with the profit.
| Basis | Capacity |
|---|---|
| Cash flow, £2m EBITDA | £6m |
| Cash flow, £1m EBITDA | £3m |
| Borrowing base, book unchanged | £4.25m |
Derived arithmetic on the published point that the base holds where receivables keep collecting. Cash-flow capacity at three times EBITDA, falling from £2m to £1m. The £5m eligible book advanced at 85% is a stated illustration, not a published figure.
Timing, not just quantum
This is the part borrowers most often miss when comparing the two structures on headline size alone.
A term loan is sized once, on the earnings the lender can see at credit approval, and the quantum holds whether your working-capital need is at its trough or its peak. A borrowing base is re-measured on every certificate, so a stock build ahead of the season lifts availability as the goods arrive, and the line eases back as the season sells through, with no renegotiation in between.
For a business whose cash need and cash generation are months apart, that matching is worth more than a slightly larger fixed sum would be.
When the base out-lends the multiple
When the balance sheet is bigger than the earnings suggest. Three situations recur in the £3m to £15m band.
The asset-rich, thin-margin business: a distributor or wholesaler running high turnover on low margins carries a debtor book out of all proportion to its EBITDA, and a percentage of that book out-lends a multiple of that profit.
The seasonal borrower: the working-capital need peaks months before the earnings that repay it arrive, and a facility that flexes with stock and debtors fits the cycle where a fixed sum does not.
And the business coming out of a soft patch: trailing earnings understate what the company is worth, but the debtor book is still collecting at par. After a difficult year, three times a halved EBITDA halves the loan, and a cash-flow refinancing can fail on arithmetic alone. The collateral does not halve with the profit, so where the receivables remain well spread and collecting, the base holds.
In each case the borrowing base reads a strength the profit multiple cannot see. Everywhere else the comparison is closer, and often favours the simpler loan.
Where eligibility is decided
In the definitions and the reserves, which is where an advertised advance rate meets the facility you get.
An eighty-five per cent advance against an eligible book is not eighty-five per cent of your sales ledger. Invoices past a certain age fall out. Balances owed by a customer who is also a supplier are commonly netted or excluded. Export receivables, intercompany balances and disputed items are frequently carved out, and many facilities apply a concentration limit capping how much of the base any single debtor may represent.
Then reserves are taken on top: amounts held back for dilution, meaning credit notes and returns, and for other exposures the lender wants covered.
The practical consequence is that two offers quoting the same advance rate can produce materially different availability, and the only way to compare them is to run your own ledger through both eligibility definitions. That exercise is worth doing before choosing, not after.
A term loan sits quietly once drawn. An ABL line has to be reported, reconciled and audited for as long as you hold it.
| Obligation | Weight |
|---|---|
| Term loan: quarterly certificate | Sits quietly |
| Borrowing base certificate | 40–65 on the scale |
| Aged and reconciled debtor ledger | 55–78 on the scale |
| Periodic field audits | Lender verifies directly |
Ongoing borrower obligations by weight, comparing an ABL facility with a cash-flow term loan. Illustrative of market practice; individual facilities vary in what they demand.
What it costs
More lines than a term loan, which is why the useful comparison is all-in cost per usable pound rather than a headline margin.
An ABL facility typically carries a margin on the drawn balance, an arrangement fee, a non-utilisation or commitment fee on the undrawn portion, a service or administration charge, and the cost of the field audits the lender runs on the collateral.
None of that makes it expensive in itself. It makes the comparison harder, because a facility with a lower margin and heavier ancillary costs can be dearer in practice than one with a higher headline rate. Divide the total annual cost by the funding you can realistically draw across the year, at your actual availability rather than the theoretical maximum, and compare that figure between offers and against a term loan.
The reporting discipline
Real, ongoing, and worth pricing into the decision as a cost rather than treating as an afterthought.
A cash-flow term loan sits quietly once drawn, with a quarterly compliance certificate and little else. An ABL facility asks for a borrowing base certificate monthly and sometimes weekly, supported by an aged and reconciled debtor ledger, and it is verified by periodic field audits in which the lender examines the collateral directly.
The cost is finance-team time and what it buys is availability. For a finance function that already produces clean monthly management information with a reconciled sales ledger, the incremental burden is modest. For one that closes slowly and reconciles late, it is a genuine operational change, and the facility will expose that weakness rather than tolerate it.
It is worth being honest about which of those two you are before signing, because the reporting is not optional and a base certificate that arrives late suspends availability.
When it is the wrong answer
When earnings are strong and the balance sheet is thin, which is the mirror image of the case for it.
An asset-light business with good margins, a services company with few receivables and no stock, or a software business billing in advance has little for a borrowing base to grip. The multiple lens reads that business better, and a cash-flow facility at two and a half to three and a half times EBITDA will out-lend anything the assets support.
It is also the wrong answer where the reporting burden exceeds what the finance function can carry, and where the borrower needs certainty of quantum rather than flexibility. A fixed term loan tells you exactly what you have for five years. A borrowing base tells you what you have this month.
This is a trade-off rather than a product pitch, and the comparison is close outside the three cases where the base clearly out-lends the multiple.
Common questions
What is asset-based lending?
A facility sized off the assets rather than off a multiple of earnings. The lender builds a borrowing base from the assets it will advance against, each at its own rate, and availability rises and falls with that collateral instead of amortising to zero on a fixed schedule.
What advance rate will I get on receivables?
Typically 80 to 90% of the eligible book. Trade receivables carry the highest advance rate because they are the cleanest collateral a lender has: short-dated, self-liquidating and readily valued. Stock takes a lower percentage tranche, and plant and property are advanced against on a valuation basis.
What does eligible mean here?
It is where an advertised rate meets the facility you get. Invoices past a certain age fall out, contra balances are netted, export and intercompany items are often excluded, and many facilities cap how much of the base one debtor may represent. Reserves for dilution are then taken on top, so two offers at the same headline rate can produce very different availability.
When does ABL beat a cash-flow loan?
When the balance sheet is bigger than the earnings suggest. Three cases recur: the asset-rich, thin-margin distributor whose debtor book is out of proportion to its EBITDA; the seasonal borrower whose working-capital need peaks months before the earnings arrive; and the business coming out of a soft patch, where trailing earnings understate it but the book is still collecting at par.
Why does ABL work after a bad year?
Because the collateral does not halve with the profit. Three times a halved EBITDA halves a cash-flow loan, so a refinancing can fail on arithmetic alone. Where receivables remain well spread and collecting, the borrowing base holds, and an asset-based lender can refinance a business the multiple lens has stopped reading.
How much reporting does it involve?
A borrowing base certificate monthly and sometimes weekly, supported by an aged and reconciled debtor ledger, verified by periodic field audits. The cost is finance-team time and what it buys is availability. A late certificate suspends availability, so it is not optional.
How do I compare an ABL offer with a term loan?
On all-in cost per usable pound. ABL carries a margin, an arrangement fee, a commitment fee on the undrawn portion, a service charge and audit costs, so a lower headline margin can be dearer in practice. Divide total annual cost by the funding you can realistically draw at your actual availability, not the theoretical maximum.
When is ABL the wrong answer?
When earnings are strong and the balance sheet is thin. An asset-light services or software business gives a borrowing base little to grip, and a cash-flow facility at two and a half to three and a half times EBITDA will out-lend it. It is also wrong where you need certainty of quantum: a term loan tells you what you have for five years, a borrowing base tells you what you have this month.
The full treatment sits in the guide: asset based lending.
Related terms
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.