An asset-based loan (ABL) is sized and secured primarily by the borrower’s working capital and hard assets—accounts receivable, inventory, and machinery and equipment (M&E)—rather than by a multiple of earnings. The lender advances a percentage of the value of eligible collateral, monitors that collateral continuously and controls the cash it produces.
ABL suits lower-middle-market operating companies that are asset-rich but have irregular cash flows, are growing faster than their earnings can support, or have been told by a bank that their earnings profile does not fit a cash-flow loan. It is our asset-based and corporate focus area.
The building blocks
The revolver
A revolving credit facility lets the borrower draw, repay and redraw up to the lesser of the commitment and the borrowing base. As customers pay invoices, collections reduce the balance; as new invoices are issued, availability grows again. The revolver finances the working capital cycle.
The term loan
A term loan, often secured by M&E or real estate, provides a fixed amount for expansion, an acquisition or a refinancing. It usually amortizes, because the equipment behind it depreciates. Many facilities combine a revolver and a term loan under one agreement, as in Project Orchard.
The borrowing base
The borrowing base is a formula, recalculated weekly or monthly, that converts collateral into availability. A simplified version, with illustrative advance rates of the kind commonly seen in the market (not Caldrion terms):
| Collateral | Gross value | Ineligibles | Eligible | Illustrative advance rate | Availability |
|---|---|---|---|---|---|
| Accounts receivable | $20.0M | $3.0M | $17.0M | 85% | $14.45M |
| Inventory (at net orderly liquidation value) | $8.0M | — | $8.0M | 85% of NOLV | $6.8M |
| M&E (at orderly liquidation value) | $6.0M | — | $6.0M | 80% of OLV | $4.8M |
| Less reserves | — | — | — | — | ($1.0M) |
| Borrowing base | — | — | — | — | $25.05M |
Ineligible receivables typically include invoices more than 90 days past their invoice date, amounts owed by affiliates or foreign customers, concentrations above a set limit and accounts in dispute. Reserves cover items that rank ahead of the lender in practice, such as rent owed to a landlord where inventory sits, or payroll taxes. The borrowing base explained walks through each element.
Cash control
The defining protection in ABL is control of cash receipts. Customers pay into a lockbox or a deposit account subject to a deposit account control agreement (DACA) in the lender’s favor. In a full cash dominion arrangement, collections sweep daily to repay the revolver; in a springing arrangement, the sweep begins only if availability falls below a threshold or a default occurs. Either way, the lender sees cash arrive before the borrower can redirect it.
Lockbox arrangements that control cash receipts and maintain a buffer between the loan balance and collateral value are central to how we manage risk in asset-based lending.
Underwriting the collateral, not only the business
ABL underwriting asks what the collateral would fetch in a realistic liquidation, how quickly and at what cost. The core diligence tools are:
- Field examination: an audit of the borrower’s receivables, inventory records, cash application and reporting systems, testing that the numbers in the borrowing base are real.
- Inventory appraisal: an estimate of net orderly liquidation value, which may be far below book value for work in process or specialized goods.
- M&E appraisal: orderly and forced liquidation values for equipment.
- Customer review: the credit quality and concentration of account debtors, dilution history (credits, returns and allowances) and payment terms.
We test the quality of receivables, the saleability of inventory and the real market for equipment, not only their book value. Collateral valuation and diligence covers these reports in detail.
Covenants in ABL
Because the borrowing base already limits exposure, ABL facilities often carry lighter financial covenants than cash-flow loans. A common pattern in the market is a springing fixed charge coverage ratio that applies only when availability drops below a set level, together with minimum availability and detailed reporting: borrowing base certificates, receivables and payables agings, inventory reports and monthly financial statements. See covenants explained.
Who ABL suits
| Borrower profile | Why ABL can fit |
|---|---|
| Founder-led company seeking growth capital | Non-dilutive capital sized to assets, not to a valuation |
| Seasonal or cyclical business | Availability rises with seasonal receivables and inventory |
| Company with a weak recent year | Collateral can be stronger than trailing earnings suggest |
| Management or family buyout | Working capital can support part of the purchase price |
| Turnaround with a credible plan | Lender protection rests on collateral while operations recover |
Our published approach is to underwrite founder-led businesses seeking non-dilutive growth capital to the liquidation value of hard assets rather than EBITDA multiples alone. For a buyout example, see Project Beacon; for a turnaround, see Project Anvil.
Red flags in an ABL request
- Receivables concentrated in one or two customers, or with rising dilution.
- Inventory that is slow-moving, perishable, customized or held at third-party sites without access agreements.
- Weak reporting systems: if the borrower cannot produce an accurate aging, the borrowing base is a guess.
- Bill-and-hold sales, progress billing or pre-billing, which inflate receivables that are not yet earned.
- Liens, tax claims or supplier retention-of-title rights that rank ahead of the lender.
What to send
Recent financial statements, an aging of receivables and payables, an inventory summary by category and location, an equipment list, and the published essentials: an executive summary, the schedule of collateral, the borrower bio and the sources and uses. How to request a loan has the full checklist. For our view of the market, read Collateral over multiples. Back to the chapter overview.
This entry is general information as of November 2026, not investment, legal or tax advice, and not an offer of securities.