Many of the most durable businesses in America are not glamorous. They manufacture, distribute, fabricate, assemble and service. They own receivables from creditworthy customers, inventory that sells and equipment that works. Yet some of them struggle to borrow on reasonable terms from banks, because their earnings are lumpy, their growth is fast or their recent history includes a difficult year.
We believe asset-based lending is one of the most useful—and most misunderstood—tools for these companies. This note explains how we think about it.
Two ways to look at a company
There are, broadly, two ways a lender can decide how much to lend to an operating company.
The first is cash-flow lending. The lender looks at earnings, applies a multiple and lends an amount the business can comfortably service from its expected cash flow. This works well for companies with stable, predictable earnings, and it is how much of the middle market is financed.
The second is asset-based lending. The lender looks at the assets the company owns—accounts receivable, inventory, machinery and equipment—and lends against their liquidation value. Repayment still comes from the business, but the lender’s protection comes from the collateral.
Neither approach is superior in the abstract. But they suit different companies. A business with substantial assets and irregular earnings may be a poor fit for a cash-flow loan and an excellent fit for an asset-based one.
We believe the right question is not whether a company’s earnings fit a multiple, but whether its assets protect the loan.
Who asset-based lending serves
We support lower-middle-market operating companies that are asset-rich but may have irregular cash flows or need capital for rapid expansion. In practice, we see several recurring situations.
Seasonal and cyclical businesses. Companies whose working capital needs swing through the year or the cycle. A revolver sized to the borrowing base grows and shrinks with them.
Fast-growing companies. Growth consumes working capital. A company that is winning new customers may need to build inventory and carry receivables before it is paid. Asset-based capital can expand with that growth.
Founder-led businesses. Many founders would rather not sell equity to finance growth. Asset-based lending provides non-dilutive capital, underwritten to the liquidation value of hard assets rather than EBITDA multiples alone.
Transitions and turnarounds. Companies that have had a difficult year, are changing ownership or are executing an operational turnaround. Where the plan is credible and the collateral coverage is robust, a lender who understands the assets can provide capital that a cash-flow lender cannot.
Ownership transitions. Founders approaching retirement, families passing a business to the next generation and management teams buying out an owner all need capital at a moment when the company’s earnings may not yet reflect its new leadership. Asset-based capital, secured by what the business owns, can bridge that moment.
How we underwrite the collateral
Asset-based lending is only as good as the lender’s understanding of the collateral. We approach each asset class as an owner would.
Accounts receivable. We want to know who owes the money, how reliably they pay, how concentrated the customer base is and how disputes, returns and credits affect what is really collectible. Ineligible receivables—aged, disputed, concentrated or owed by related parties—are excluded from the borrowing base.
Inventory. We want to know what it is, where it is, how quickly it sells and what it would bring in an orderly liquidation. Finished goods, raw materials and work in process behave very differently, and we treat them differently.
Machinery and equipment. We want to know what the equipment does, how it is maintained and what the real secondary market for it looks like. Book value is a starting point, not an answer.
These assessments set the advance rates against each class of collateral and, together, the borrowing base that determines how much we lend at any moment.
What a borrowing base really is
The borrowing base is the heart of an asset-based facility, and it is worth explaining in plain terms. Each class of collateral is assigned an advance rate: the share of its eligible value the lender is willing to lend against. Receivables from creditworthy customers that pay on time typically support a higher advance rate than inventory, and inventory a higher rate than specialized equipment, because each is progressively harder to turn into cash. The sum of those advances, less any reserves the lender holds back for specific risks, is the borrowing base.
The company can borrow up to the lower of the facility size and the borrowing base. As it invoices customers, eligible receivables rise and so does availability. As customers pay, collections reduce the loan. As inventory is built for a busy season, availability grows; as it is sold, the inventory advance converts into receivables and then into cash.
That rhythm is what makes asset-based lending so well suited to working-capital-intensive businesses. The facility breathes with the company. And because availability is tied to collateral that is reported and verified regularly, the lender’s protection is refreshed continuously rather than tested only at maturity.
Common misconceptions
That asset-based lending is a last resort. It is sometimes seen as financing for companies that cannot borrow any other way. We see it differently. For many asset-rich businesses, it is simply the most efficient form of senior debt, because it lends against what the company actually owns.
That it is administratively burdensome. Borrowing-base reporting and field examinations do require effort. But for a company with good systems, they formalize information management already tracks. We try to set reporting at a cadence that matches the risk, not a default schedule.
That it caps growth. The opposite is usually true. Because availability rises with receivables and inventory, a well-structured revolver grows with the business in a way that a fixed cash-flow loan does not.
That the lender is only interested in liquidation. We underwrite to liquidation value because it protects the loan. But we lend because we want the business to succeed, repay and grow. A lender who understands the collateral is, in our view, better placed to support a company through a difficult period, not less.
In our view, the quality of an asset-based loan is decided long before closing, in the quiet work of understanding what the collateral is really worth.
How we stay close to the collateral
Asset-based lending is not a set-and-forget activity. The collateral changes every day as the company sells, collects, buys and builds. We stay close to it through:
- Borrowing-base reporting, so availability tracks eligible collateral.
- Lockbox arrangements that control cash receipts and apply collections to the loan.
- Field examinations and appraisals, so our view of the collateral reflects reality, not only reported figures.
- Covenants that give early warning when performance drifts.
These tools maintain a buffer between the loan balance and collateral value. Done well, they are not burdensome for a well-run company; they formalize the visibility a careful owner already has.
Structure and terms
We provide revolvers and term loans, often in combination: a revolver against receivables and inventory, and a term loan against equipment. Our loans are $5M–$50M, on terms of 12–36 months with extension options, priced at SOFR + 600–900 bps or a fixed-rate equivalent. We focus on the top of the capital structure: first-lien, senior secured positions.
Within that framework, we try to fit the structure to the business. A seasonal company may need availability that peaks at a particular time of year. A growing company may need a facility that can expand as its borrowing base does. A company in transition may need covenant levels that reflect its plan rather than its past.
Why we believe this is a moment for asset-based lending
Several forces make asset-based lending particularly relevant now. Banks have become more selective about middle-market relationships. Higher base rates have strained companies whose debt was sized to lower rates. And many founder-led businesses face ownership transitions that require flexible capital. In each case, we believe a lender who can underwrite collateral, rather than only earnings, can provide something valuable.
The risks we take seriously
Collateral values can fall, receivables can age and inventory can become obsolete. Fraud, while rare, is a risk every asset-based lender must guard against. Our defenses are conservative advance rates, rigorous monitoring, field examinations and lockbox control of cash. Above all, we believe in staying close to the borrower: a lender who knows a business well sees problems early.
Why permanent capital suits asset-based lending
Asset-based relationships reward continuity. A lender who stays with a company through a cycle learns its rhythms and can extend support as the business grows into its plan. Because Caldrion lends its own permanent capital and holds every loan on its balance sheet, we are not under pressure to exit a performing relationship.
If you own or advise an asset-rich company that needs capital, share a link to non-confidential materials—recent financial statements, an aging of receivables, an inventory summary and an equipment list—and tell us what the capital is for. We aim to give initial feedback within 72 hours of receiving a complete package.
This article reflects Caldrion’s views as of November 2026. It is not an offer of securities or investment advice.