Asset-based lending (ABL) is a form of secured lending in which the amount a company can borrow is tied, dollar for dollar, to the value of specific collateral — most commonly accounts receivable and inventory, and sometimes machinery, equipment, or real estate. Where a cash-flow loan asks "how much EBITDA does this company generate?", an ABL facility asks "what are the assets worth if we had to collect them?"
The central mechanism is the borrowing base. The lender applies advance rates to eligible collateral: a typical structure might advance up to 85% of eligible accounts receivable and 50–65% of eligible inventory (often benchmarked to a percentage of net orderly liquidation value established by appraisal). The sum, minus reserves, is the maximum the borrower may draw at any moment. The borrower certifies the base periodically — monthly in normal times, weekly or daily in stress.
Eligibility rules do a lot of the credit work. Receivables might be excluded if they are more than 90 days past due, owed by an affiliate, concentrated beyond a limit in one customer, subject to offset, or owed by a foreign account debtor. Inventory may be ineligible if it is slow-moving, in transit, on consignment, or located at sites without landlord waivers. Reserves — for rent, taxes, returns, or dilution — further trim availability.
Monitoring is what makes ABL distinctive. Lenders conduct field examinations (audits of the borrower's books and collateral records) and commission independent appraisals of inventory. Many facilities use cash dominion: customer payments flow into lender-controlled lockbox accounts and sweep down the loan daily, either at all times ("full dominion") or when availability falls below a trigger ("springing dominion").
Covenants are typically lighter than in cash-flow deals — often just a springing fixed charge coverage ratio tested only when availability drops below a threshold. The logic is that the borrowing base itself is the covenant: as collateral shrinks, so does the loan, automatically.
Who uses ABL? Retailers, distributors, manufacturers, and other working-capital-heavy businesses; companies in cyclical sectors whose earnings swing too much for leverage-based covenants; and companies in turnaround, for which ABL is often the last committed capital available because the lender relies on collateral rather than projections. ABL revolvers also pair with term loans in larger capital structures, with intercreditor agreements dividing collateral into "ABL priority" (working capital assets) and "term priority" (fixed assets and equity).
For credit watchers, the signals that matter are availability (undrawn borrowing base capacity — the real liquidity cushion), dilution (the share of receivables that never converts to cash due to returns, disputes, and credits), and appraised recovery values, which move with the used-equipment and liquidation markets. A retailer's press release citing "ample liquidity" usually means ABL availability — and it can evaporate quickly when inventory values are re-appraised downward.