Collateral options for ABL: What’s eligible, what’s not?

January 29, 2021

If your business has high inventory levels or is poised for rapid growth, but lacks cash flow, an asset-based loan (ABL) might be the perfect fit. Find out if an asset-based loan could work for your organization.  


Does your organization have accounts receivable and inventory that can be leveraged to improve liquidity? The nature and quality of your working capital can make all the difference.

Companies that maintain high levels of quality working capital assets and produce modest cash flow are ideal candidates for an asset-based loan (ABL).


Find out if an ABL is right for you

Liquid collateral is key for leveraging an asset-based loan
Large retailers, manufacturers and distribution companies are good candidates for ABLs as they invest significantly in working capital and often produce relatively low free cash flow (FCF).

“An ABL can be perfect for a company of this profile, particularly if they are poised for rapid growth, acquisitions or considering a shareholder buyout,” says Dave Slavik, senior vice president for U.S. Bank Asset Based Finance.

The traditional way to measure senior debt capacity is a function of cash flow, typically calculated as a three to four time multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). ABL uses a borrowing base predicated on working capital liquidation values, which typically range from 40 percent to 70 percent for inventory and 80 percent to 90 percent for accounts.

Many companies can generate higher debt capacity via a borrowing base, rather than traditional commercial loans. 


Eligible collateral has a hierarchy

“Lenders specializing in asset-based loans look for collateral that’s liquid,” Slavik adds. The stack-rank asset preference is typically as follows:

  1. Receivables 
  2. Inventory 
  3. Equipment 
  4. Real estate

“The higher an asset is in the ranking, the more liquid it is,” Slavik explains. “Ideal collateral are accounts receivable or inventory that’s easily valued and monetized. These include commodities such as metal, lumber, food, fuel or oil. Generally, the faster that the asset turns, the more attractive it is as collateral.”

Conversely, ineligible assets are usually those with lower value or those that may be subject to material shifts in consumer trends. For example, a wholesaler of shingles is considered stable because the size, look, construction and volume of inventory isn’t likely to experience material year-to-year changes. This stability isn’t the same for a wholesaler of apparel or technology-based products. Both examples are subject to potential obsolescence due to changes in demand trends and product mix. 


Some collateral types are more challenging than others

For purposes of securing an ABL, lenders find the following collateral less desirable:

  • Receivables that are past due or subject to high dilution levels 
  • Foreign receivables without insurance 
  • Inventory that is primarily seasonal, slow-moving, specialized or consigned 
  • Single purpose real estate or equipment that can be difficult to monetize

Large facilities, such as a steel mill or foundry, are challenging as collateral, but multipurpose buildings like warehouses near dense city centers are not.

“Inventory subject to trademarks can also be challenging,” Slavik adds, “mainly due to the potential for the trademark owner to restrict liquidation channels in an effort to protect its brand. Also, inventory considered to be work in process is typically not eligible for borrowing or will have a reduced advance rate.”


It’s prudent to prepare for a meeting with prospective lenders

Lenders often start the process of evaluating a borrower by dispatching field examiners to review their working capital assets. If applicable, third party appraisers are also engaged to evaluate inventory, machinery and equipment, and real estate. After funding, the lender tracks adjustments in value through periodic field exams and inventory appraisals during the lending period. As a borrower, you will be asked to submit reports at least monthly, that reflect changes in the quantity and/or value of your working capital assets.

At U.S. Bank, we recommend that you prepare for your initial conversation with a lender by examining your collateral to determine eligibility. It would be helpful to calculate your rate of dilution. That’s determined by the difference in initial invoice billing vs. the final net collection. “Dilution of less than five percent is preferred,” Slavik says.


ABL pricing can be competitive with traditional loans

Costs can vary by lender, but most borrowers can expect to pay loan costs – such as a closing fee, a direct interest charge, unused fees and modest monitoring fees. Despite more aggressive leverage tolerance and higher advance rates, ABL pricing can be competitive with traditional loans, because it has a proven track record in minimizing lender losses.


At U.S. Bank, we’re here to help you decide if an ABL is right for your organization. Contact your relationship manager or visit to learn more.

Related content

Integrated receivables management solution supports customer focus at MSC Industrial Supply

Emerging A/R solutions use artificial intelligence to target efficiency

Renewing your custody contracts? Negotiate the fees.

How jumbo loans can help home buyers and your builder business

Evaluating interest rate risk creating risk management strategy

Middle-market direct lending: Obstacles and opportunities

How liquid asset secured financing helps with cash flow

4 benefits of independent loan agents

Everything you need to know about consolidating debts

When small companies buy big: The potential of asset-based lending

How to maximise your infrastructure finance project

Take the stress out of buying your teen a car

How I did it: Deciding whether to buy an RV

Questions to ask before buying a car

What you should know about buying a car

How to choose the best car loan for you

What you need to know before buying a new or used car

Can you take advantage of the dead equity in your home?

How to get started creating your business plan

How to fund your business without using 401(k) savings

Opening a business on a budget during COVID-19

Costs to consider when starting a business

How to establish your business credit score

When to consider switching banks for your business

How a small business is moving forward during COVID-19

Prioritizing payroll during the COVID-19 pandemic

5 tips to help you land a small business loan

Investing in capital expenditures: What to discuss with key partners

Drivers for changing accounts receivable in 2021

Digitizing receivables to transform B2B rent payments

Can ABL options fuel your business — and keep it running?

Collateral options for ABL: What’s eligible, what’s not?

Beyond Mars, AeroVironment’s earthly expansion fueled by U.S. Bank

How AR technology is helping advance payment processing at Avera Health

Protecting cash balances with sweep vehicles

Tech lifecycle refresh: A tale of two philosophies

At your service: Outsourcing loan agency work

Tailor Ridge eBill case study

Maximizing your infrastructure finance project with a full suite trustee and agent

What is a CLO?

An investor’s guide to marketplace lending

Alternative assets: Advice for advisors

How to choose the right custodian for your managed assets

ABL mythbusters: The truth about asset-based lending

Digital receivables to meet changing demand

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.

U.S. Bank is not responsible for and does not guarantee the products, services or performance of U.S. Bancorp Investments, Inc.