Asset Based Lending (ABL) is a specialized loan product that provides fully collateralized credit facilities to borrowers with high financial leverage and marginal cash flows.
High leverage and tight cash flow can be the result of the following:
Acquisition
Management Buyout
Recapitalization
Growth Financing
Turnaround
Borrowings under an asset-based facility are limited by a borrowing base, which is comprised of advance rates applied to the liquidation value of accounts receivable, inventory and fixed assets. These assets serve as collateral for the revolving credit and term loan, respectively.
A typical ABL facility includes a three-year revolving credit that is used to support working capital needs and may include a term loan. The term loan will not exceed 40% of the total combined credit facility and amortizes between 5-15 years, depending on the useful life of the underlying asset.
Asset-based facilities can easily be combined with other sources of capital including high yield bonds, asset securitizations, mezzanine financing and second lien financing.
Differences Between ABL and Traditional Commercial Financing
ABL's primary focus is on collateral and liquidity with leverage and cash flow being secondary considerations.
Typically, asset-based facilities provide borrowers with more liquidity and fewer financial covenants.
Asset based borrowers usually have higher financial leverage and marginal cash flows.