Pictured, left to right: authors Mark Fagnani and Jason Schumacher

Asset-based lending offers many benefits to borrowers in need of capital, not the least of which is the partnership built between client and lender.

Asset-based lending is possibly the best type of financing for any sized company. But what is it? Let’s describe it here and then talk about why it works so well.

Asset-based lending (ABL) as the name implies, is a form of secured lending. The primary sources of collateral to secure the loan are Accounts Receivable (A/R), Inventory, Machinery and Equipment (M&E), Real Estate and Intellectual Property (IP), typically in that order of preference.

The lender will file UCC financing statements (a type of public notice) over the assets being pledged. That, coupled with a security agreement, will provide a priority lien that adds an additional form of repayment and level of protection for the loan.

Some asset-based lenders are bank-owned entities. Others are non-bank companies. Each has advantages and disadvantages. Bankowned ABL lenders are regulated and therefore may be subject to certain restrictions. On the other hand, they can offer a variety of bank services, including cash management and letters of credit. Non-bank ABL lenders are not regulated and may have a greater risk appetite and fewer layers of command in the decision-making chain. Prospective borrowers should meet with both types to determine what best suits the needs of your company.

Lenders conduct preliminary due diligence on a prospective borrower’s collateral to determine performance metrics – who are the customers, what is the customer concentration, what are their paying habits, what is the normal level of returns or allowances, how is the inventory maintained and accounted for, etc.?

Lenders may retain an appraisal firm to provide a reasonable estimate of the recovery values of the inventory under a variety of assumptions. The same would be true of M&E, Real Estate and/or IP. 

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