Asset-based lending (ABL) is business financing secured by assets, most often accounts receivable and inventory, and sometimes equipment or real estate. The amount available rises and falls with the value of the collateral.
How it works in factoring
An ABL line is usually sized by a borrowing base, recalculated regularly:
Illustrative example: A lender agrees to advance an assumed 85% of eligible receivables and 50% of eligible inventory. With $400,000 eligible receivables and $200,000 eligible inventory, the borrowing base is $340,000 + $100,000 = $440,000.
"Eligible" excludes items such as receivables past a set age, amounts owed by affiliates, foreign accounts or concentrations over a limit.
ABL and factoring compared:
| Asset-based lending | Factoring | |
|---|---|---|
| Legal form | Loan | Usually a sale of invoices |
| Who collects | Usually the borrower | Often the factor |
| Customer notified | Usually not | Often yes |
| Cost basis | Interest plus fees | Discount fee plus charges |
| Reporting | Borrowing base certificates, audits | Schedules of accounts |
| Fit | Larger, established firms | Wider range, including younger firms |
ABL lenders typically require stronger financial reporting and periodic field exams. Some factors offer ABL-style lines as clients grow.
What to check
- How eligibility and reserves reduce the borrowing base
- Financial covenants and reporting frequency
- Field exam and audit costs
- Prepayment or early termination fees
For a business outgrowing factoring, an ABL line can lower cost but adds reporting work.