ABL is a revolving line of credit that combines the ease of a bank line of credit secured by a “borrowing base.” The “borrowing base” is an asset used as collateral that is typically accounts receivable, but might also include inventory, equipment or even real estate. How much credit a borrower can access is primarily determined by the quality and value of the collateral. The size of an ABL loan is typically larger than unsecured types of loans and ranges between $100,000 and $5,000,000.
An ABL is used when a typical senior bank loan is not an option. Unlike traditional loans that are based on the creditworthiness of the borrower, asset-based revolving credit lines are based on the value of the assets and creditworthiness of your customers. The primary factors that are used to underwrite the credit include age of invoice, when it is due to be paid, and the credibility of the borrower. Essentially, you can obtain financial support for your business on its own merit using your accounts receivable and the principle source of repayment. In the case of accounts receivable, the lender may advance funds based on 70%-85% of receivables, and up to 50% on inventory. The borrower gets immediate cash by assigning the future revenue associated with their accounts receivable.
An ABL provides quick funding that can be accessed without a long, drawn-out approval process and provides flexibility and increased availability.