Asset based lending: borrowing against what your business owns

An asset based loan lets an operating business borrow against what it already owns: receivables, inventory, and sometimes equipment or real estate. Instead of lending mainly on cash flow, the lender looks at the value of the collateral and how quickly it could be turned into cash. For a company that is growing fast, carries seasonal inventory, or has uneven earnings, that difference can open up more capital than a traditional bank line would. Knowing how the structure works helps an owner decide whether it fits.

How the borrowing base works

The core of an asset based facility is the borrowing base. It is a formula that sets how much the company can draw at any moment.

• Eligible receivables. The lender advances a percentage of invoices that meet its criteria. Invoices past a set age, amounts owed by affiliates, and foreign or government receivables are often excluded or limited.
• Eligible inventory. Finished goods usually count for more than raw materials. Work in process often counts for little or nothing. Advance rates are typically based on an appraised liquidation value, not cost.
• Reserves. The lender can hold back part of the availability for items such as unpaid rent, taxes, or customer concentration.

As sales grow, receivables and inventory grow, and so does availability. When the business slows, availability shrinks with it. That link is the main appeal and the main thing to plan around.

Why owners choose it

Asset based lending tends to fit a few situations well.

• A company is growing faster than its trailing earnings can support under a cash flow loan.
• The business is seasonal and needs to build inventory well ahead of sales.
• Earnings dipped for a period, and a bank is reluctant to renew a line on the usual terms.
• An acquisition, recapitalization, or turnaround needs more liquidity than a cash flow lender will provide.

Many asset based facilities also carry lighter financial covenants than a cash flow loan. Some have only a single test that applies when availability falls below a set level.

What it asks of the borrower

The tradeoff is oversight. Owners should expect a higher level of reporting and lender involvement than a typical bank line.

Reporting

Most facilities require a borrowing base certificate on a regular schedule, along with receivable and payable agings and inventory reports. Busy periods often bring more frequent reporting.

Field exams and appraisals

The lender will send examiners to test the receivables, review the accounting, and confirm the inventory. Inventory appraisals are repeated on a schedule. The company usually pays for both.

Cash control

Customer payments are often directed to a lockbox or controlled account, and collections pay down the loan. The company then draws again as needed.

Questions to answer before you apply

A little preparation makes the process smoother and the terms better.

• How clean are the receivables? Concentration in a few customers, long payment terms, or frequent credits and disputes will reduce what counts as eligible.
• How well is inventory tracked? A reliable perpetual inventory system and clear records by location and category build lender confidence.
• Can the accounting team handle the reporting? If not, budget for help before closing, not after.
• What is the real need? Compare peak availability against peak need through the year, not just today.
• What happens at a downturn? Model what availability looks like if sales fall, and whether the business still has the liquidity it needs.

Is it the right fit?

Asset based lending is not better or worse than a cash flow line. It is a different tool. It rewards a business with strong collateral and good systems, and it can provide room to grow when earnings alone would not support the borrowing. It is less suited to a company with few hard assets or a finance team that is already stretched.

To see how a facility like this fits alongside your other financing, try the capital readiness tool. When you want to talk through your options, contact us.

Thomas Capital Holdings is not a registered investment adviser and does not provide investment advice or recommend securities. Consult your own advisors about your situation.