Wondering whether asset-based lending could fit a business that has plenty of assets but uneven cash flow? In short, it is borrowing secured by assets such as receivables and inventory, with the amount capped by a borrowing base.
This explainer is part of the site’s wider coverage of small business finance.
| Item | Value |
|---|---|
| Receivables typically considered | Less than 90 days from invoice date or no more than 60 days past due |
| Traditional advance on eligible receivables | 80% to 85% |
| Traditional advance on eligible inventory | 50% of cost |
| Example collateral cushion | 10% of receivables uncounted when 90% is advanced |
| Era of reporting automation | Mid-1990s through the 2010s |
The figures come from Bank of America Business and ABF Journal. Figures and lender practices can change, and terms vary by provider and country, so check the source before you rely on them.
How asset-based lending works
With asset-based lending, often shortened to ABL, a lender focuses mainly on the value of a company’s assets rather than its earnings. Bank of America’s business guide contrasts this with cash-flow lending, which usually relies on metrics such as funded debt divided by EBITDA.
The assets act as collateral that secures the loan. The same guide says a broad range of assets, from accounts receivable to real estate and intellectual property, can serve as collateral.
Before any money is available, the lender checks what actually qualifies. According to the guide, the company undergoes field examinations, and the field examination and inventory appraisal determine the eligible collateral and the advance rates against them.
Bank of America describes prime candidates as asset-rich companies that may have variations in cash flow but need significant capital to operate and grow. It lists manufacturers, distributors, wholesalers and retailers as examples.
What is a borrowing base?
Wall Street Prep, in a page updated Apr. 26, 2024, defines the borrowing base as the limit a lender places on a financing arrangement, based on the collateral pledged to secure a line of credit or asset-backed loan. The source of that page is Wall Street Prep.
It adds that a revolver can be drawn from and paid down on an ad hoc basis, but the borrowing base sets the ceiling. Its general overview of the calculation starts with these steps:
- Identify the eligible assets, such as accounts receivable and inventory, using the lender’s criteria.
- Estimate the fair value of those assets, for example through an independent appraisal.
- Apply advance rates, which are percentages that reflect the lender’s view of collateral quality and liquidity risk.
Because collateral values move, the borrowing base moves with them. Wall Street Prep says that when there is a surplus the borrower can draw more, and when there is a deficit the borrower needs to inject cash or replace assets with higher-value ones to pay down the debt.
Which assets can serve as collateral
Lenders tend to favour assets that turn into cash quickly. Wall Street Prep says the two most common current assets accepted as collateral are inventory and accounts receivable, while fixed assets would require a considerable amount of time and a hefty discount to convert.
Bank of America lists the assets a lender may look at, in roughly this order:
- Accounts receivable, which come first.
- Inventory.
- Machinery and equipment.
- Real estate.
- Intellectual property.
Not every receivable counts. Per Bank of America, typically only current receivables are considered: those less than 90 days from invoice date or no more than 60 days past due.
The same filtering applies to stock. In a September 9, 2026 piece, ABF Journal notes that obsolete and damaged inventory generally will be ineligible, and that the gap between the advance rate and the full value is a collateral cushion. Its example: if a lender advances 90% of eligible receivables, the 10% not counted is the cushion.
How the approach has changed over time
Asset-based lending is not new. A guide from the finance company eCapital, last modified Jul 29, 2026, says a significant shift occurred in the 1980s, when it started to be used to address companies’ working capital requirements.
An ABF Journal article describes the older borrowing base as restrictive and almost purely liquidation-focused. Lenders typically advanced against only 80% to 85% of eligible receivables plus 50% of the cost of eligible inventory, and then deducted reserves for anticipated costs of reaching the collateral.
The same ABF Journal article says the industry and the borrowing base evolved from the mid-1990s through the 2010s with the automation of financial and collateral reporting. Technological integration led to a pivot from monthly paper reporting to daily or weekly electronic data reporting. Appraisals also shifted toward a Net Orderly Liquidation Value measure, which looks at what hard assets would fetch in a structured, managed liquidation.
More recent changes, per ABF Journal, include:
- Advances against trademarks, patents and brand equity, supported by third-party appraisals.
- For software and technology companies, lending against annual or monthly recurring revenue instead of traditional receivables.
- Growing use of work-in-process and unbilled revenue in the borrowing bases of service providers.
Costs, risks and trade-offs to weigh
The sources reviewed here give no fee or interest-rate figures, and terms vary by provider and country. Any cost comparison has to come from the actual documents a lender provides.
Bank of America says ABL may offer a covenant-light structure, because a business needs only to maintain a minimum level of liquidity to avoid a financial covenant. Covenant-light is not covenant-free, and the borrowing base itself still limits how much can be drawn.
Points that commonly matter to borrowers:
- Field examinations and appraisals are part of the process, as described by Bank of America.
- Reserves can reduce otherwise available credit, according to ABF Journal.
- A falling collateral value can create a deficit that requires cash or replacement assets, per Wall Street Prep.
- On default, Wall Street Prep says the lender has the right to seize the collateral.
How it relates to other financing
ABL sits in a wider family of receivables-, inventory- and asset-backed products. As a neutral example, eCapital’s website, on a guide last modified Jul 29, 2026, lists asset-based lending, A/R financing and inventory financing as asset-based finance, and invoice factoring under a separate factoring heading.
If you are comparing routes, the explainer on merchant cash advance explained covers a different structure, and the page on what is trade credit looks at financing that arises between buyers and suppliers.
Frequently asked questions
What is asset-based lending?
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It is a form of business borrowing in which assets such as receivables, inventory, equipment or real estate secure the loan. Bank of America describes it as an alternative to cash-flow lending, where the lender mainly looks at the strength and stability of cash flow.
Which assets are used most often?
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Wall Street Prep says inventory and accounts receivable are the two most common current assets accepted as collateral. Bank of America also lists machinery, real estate and intellectual property.
What happens if the borrowing base falls?
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Wall Street Prep says a deficit means the borrower needs to inject cash or replace existing assets with higher-value assets to pay down the debt. The exact mechanics depend on the lending agreement.
Does asset-based lending come with covenants?
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Bank of America says it may be covenant-light, with a minimum level of liquidity needed to avoid a financial covenant. The actual terms vary by provider and country.
This page is for general information and education only and is not financial, investment, tax or legal advice.
