Asset Based Lending and What It Costs a Small Business

Your bank said no to a bigger line of credit, yet you are sitting on $600,000 of receivables and a warehouse full of stock. Asset based lending is built for exactly that mismatch, but the headline rate rarely tells you what the facility will cost once the fees, audits and reserves are counted.

I spent years underwriting these deals. Here is how a facility is sized, what it costs in a normal year, and when it is the wrong tool even though the lender is happy to sign.

What asset based lending actually is

An asset based loan, usually called an ABL, is a revolving line of credit secured by your working assets rather than by your profit history. The lender cares less about last year's net income and more about what it could collect if it had to step in tomorrow. That means receivables, inventory, and sometimes equipment or real estate.

The key number is the borrowing base: eligible assets times an advance rate for each class. It is the most you can draw, and it shrinks automatically when your receivables do.

This is different from what invoice factoring actually costs you. With factoring, you sell individual invoices and the factor often collects from your customers. With an ABL you keep control of collections and your customers usually never hear about the lender.

How the borrowing base is calculated

Lenders do not lend against the face value of your assets. They haircut each class to reflect how much they could realistically recover. Typical advance rates in the lower middle market look like this:

Asset class	Typical advance rate	What gets excluded
Eligible receivables	80 to 85 percent	Invoices over 90 days, foreign and related party accounts
Finished goods inventory	50 to 65 percent of cost	Slow moving, obsolete and consigned stock
Raw materials	30 to 50 percent of cost	Items with no resale market
Equipment (term piece)	70 to 80 percent of orderly liquidation value	Specialized tooling with thin resale demand

Here is a worked example. A distributor reports $600,000 of receivables, of which $90,000 is over 90 days and $30,000 is owed by an affiliated company. Eligible receivables are $480,000. At 85 percent, that supports $408,000. Add $400,000 of finished goods at cost with $60,000 flagged as slow moving, so $340,000 eligible at 55 percent gives $187,000. The borrowing base is $595,000, not the $1 million the owner had in mind.

Many lenders also cap inventory at about 50 percent of the base and add reserves, such as for rent owed to a landlord. Your accounts receivable aging report becomes the most important document you produce each month, because every aged invoice cuts your availability.

What asset based lending really costs

The quoted rate for a smaller ABL is usually prime plus 1 to 4 percent from a bank group, or a flat 10 to 18 percent from a non bank lender for riskier files. A realistic cost stack for a $1 million facility with an average $600,000 drawn looks like this:

Interest: at 11 percent on $600,000, about $66,000 a year.
Origination fee: 0.5 to 1.5 percent of the commitment, so $5,000 to $15,000 up front.
Unused line fee: 0.25 to 0.5 percent on the undrawn $400,000, roughly $1,000 to $2,000.
Field exams: $3,000 to $8,000 each, usually two to four a year at your expense.
Inventory appraisals: $5,000 to $15,000 once a year if inventory is in the base.
Collateral monitoring fee: $500 to $1,500 a month with some non bank lenders.
Minimum interest: charged as if you drew a set amount, often 40 to 50 percent of the line, even in quiet months.

Add it up and the all in cost on that facility lands somewhere between 14 and 20 percent of the average balance in year one.

The fees that bite on the way out

Most facilities run two or three years and carry an early termination fee of 1 to 3 percent of the full commitment, not the drawn amount. If your business improves and a bank offers a cheaper line in month 14, leaving could cost $20,000 on a $1 million facility. Ask for the fee to step down to zero in the final year, and for a waiver if you refinance with the same lender's bank arm.

Who it fits and who should pass

Asset based lending works best for companies with real receivables from creditworthy customers, steady inventory turns, and a reason the bank cannot lend on cash flow alone. Common examples are distributors, manufacturers, wholesalers and staffing firms growing faster than their earnings, or businesses coming off one bad year with solid assets.

It fits poorly in three situations:

Service businesses with thin receivables. A consultancy with $80,000 of invoices will not justify the exam and monitoring costs. A plain line of credit or an SBA microloan is cheaper.
Retailers paid at the till. With almost no receivables, availability rests on inventory at low advance rates.
Companies whose books are messy. If you cannot produce an accurate aging and inventory report every month, the field exam will find problems and the lender will add reserves.

The common advice to treat ABL as a last resort is wrong

Owners are often told that asset based lending is a lender of last resort, one step above a merchant cash advance. I disagree, and the reason is structural. A cash flow loan sizes your credit on trailing earnings, which means a fast growing company is always borrowing against last year's smaller business. An ABL grows as your receivables grow, so the credit arrives in the same month the cash need appears.

The reporting burden is real, but it forces habits growing companies need anyway: weekly collections reviews, clean inventory counts and a monthly close that actually closes. Compare that with why a merchant cash advance is a last resort, not a first, where the cost runs far higher and nothing about the product improves how you run the business.

The fair warning is about covenants. Many ABLs include a springing fixed charge coverage test, often 1.0 to 1.1 times, that only applies when availability drops below a set level. Know exactly where that trigger sits.

How to prepare before you apply

Lenders move faster and price better when the file is clean. Before you contact anyone, pull these together:

Twelve months of receivable agings and payable agings, month end.
A current inventory listing by location and category, with cost and last sale date.
Two years of financial statements plus year to date, with notes on any one off losses.
A list of your top ten customers with their share of sales and payment terms.

Then calculate your own borrowing base using the table above. If the number is less than 1.5 times the draw you expect to need, the fixed costs will eat too much of the benefit and you should look at simpler options first.

Frequently asked questions

What credit score do you need for asset based lending?

There is usually no hard personal credit floor, because the collateral carries most of the risk. Lenders still check for recent bankruptcies, tax liens or judgments, but a score in the 600s rarely blocks a deal with strong receivables.

How long does it take to close an asset based loan?

Expect four to eight weeks. The field exam and any inventory appraisal take most of that time, and messy records add more.

Is asset based lending the same as factoring?

No. Factoring is a sale of specific invoices, usually with notice to your customer, and the fee is charged per invoice. Asset based lending is a loan against a pool of assets, you keep collecting your own invoices, and interest is charged only on what you draw.