Asset-based lending (ABL) revolves around a concept called the borrowing base — a formula-driven calculation that limits a borrower's outstanding loan balance to a specified percentage of eligible collateral assets. Unlike cash flow lending, where availability is fixed at closing and governed by financial covenants, ABL availability expands and contracts daily as the underlying collateral changes.
The borrowing base typically includes two primary asset categories: accounts receivable and inventory. Eligible receivables are those that meet defined criteria — generally current (not more than 90 days past invoice date), not concentrated in any single account debtor above a threshold, and not subject to contra accounts or disputes. Eligible inventory is valued at the lower of cost or market value and includes finished goods, raw materials, and sometimes work-in-process.
Lenders apply advance rates — typically 80–90% on eligible receivables and 50–65% on eligible inventory — to each asset class to calculate the borrowing base. These advance rates reflect estimated net liquidation values, providing lenders with a cushion in a distressed scenario. The sum of advances against each asset class, subject to sub-limits and caps, defines total availability.
Borrowers submit borrowing base certificates — typically weekly or monthly, more frequently during distress — that certify the current value and eligibility of their collateral. Lenders have the right to conduct periodic field examinations ("field exams") and appraisals to verify the accuracy of borrowing base reports and assess collateral quality.
The dynamic nature of the borrowing base makes ABL a naturally self-policing structure. As a business deteriorates, receivables age out and become ineligible, inventory builds or becomes unsaleable, and availability shrinks — automatically reducing lender exposure at the time of maximum stress. This dynamic makes ABL particularly well-suited for cyclical businesses, retailers, distributors, and manufacturers.