Your company’s assets don’t just fuel day-to-day operations. With asset-based lending, they can unlock liquidity needed to drive growth, manage cash flow and fund strategic transformation.
Mac Fowle, J.P. Morgan’s head of Asset-Based Lending, explains how asset-based loans (ABLs) work and what makes them a uniquely flexible form of commercial financing.
What is ABL?
An ABL allows a company to use assets—including accounts receivable, inventory, equipment and real estate—to secure credit. Asset-rich, working capital-intensive businesses often use ABLs, as do companies with uneven cash flow. ABLs are common across sectors, such as consumer products, apparel, retail, distribution, food and beverage, automotive, metals, energy and other forms of industrial manufacturing and processing.
ABLs are often structured as revolving lines of credit but can also include term loans, particularly when the company’s collateral includes longer-term assets, such as fixed equipment or real estate.
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How asset-based lending works
Many commercial loans, including traditional cash flow-based loans, are secured by collateral. But ABLs have three key features that distinguish them from other secured business loans.
1. Borrowing base
In asset-based lending, borrowing capacity moves with your business. Loan size is primarily determined by the borrowing base, which adjusts monthly.
Unlike an equipment loan or commercial mortgage, an ABL’s borrowing base generally includes multiple asset types or the company’s entire asset base. More receivables or inventory means more available credit. Seasonal slowdowns automatically reduce your borrowing capacity and interest costs.
2. Cash dominion
ABLs typically have fewer financial maintenance covenants than traditional cash flow loans, but generally have additional reporting and cash dominion requirements. When cash dominion is in effect, a business’s incoming cash is deposited into a lender-controlled account and used to pay down the outstanding loan balance, freeing up borrowing capacity for the business’s cash needs. ABLs may require cash dominion throughout the loan term or on a “springing” basis, triggered by an event such as failing to meet a liquidity threshold.
“Those features mean we can often give the borrower more covenant flexibility than they’d get with a non-asset-based loan, with competitive pricing,” Fowle said. “That gives our borrowers more freedom to manage the business in the way they see fit.”
3. Collateral assessment
A company applying for an ABL can expect a lender to assess its overall credit profile, cash flow and financial projections, much like a traditional commercial loan. But the lender will also take a deeper dive into collateral, supporting the loan with a field examination that includes a review of a company’s accounts receivable and payable and third-party appraisals of assets such as inventory, equipment or real estate.
Field examinations are typically refreshed once or twice a year. Companies must also provide regular reports on their borrowing base, usually on a monthly or weekly basis.
While ABLs come with some additional administrative responsibilities, a company’s existing finance or treasury teams can usually accommodate them, Fowle said. Additionally, new and emerging technology is making the administrative burden—previously a barrier to entry for ABLs—less of a factor.
Benefits of ABLs
Asset-based lending’s distinct structural features come with benefits for borrowers:
Flexibility
Asset-based lending offers financing that scales with a company’s asset base and minimizes financial covenants. That flexibility can be particularly useful to companies experiencing:
- Rapid growth: A company that needs working capital to fuel expansion may not generate enough free cash flow for a traditional cash flow-based loan. An ABL allows it to use its asset base to fund growth.
- Irregular cash flow: An ABL’s flexible covenant package can be attractive to seasonal or cyclical businesses with fluctuating cash flow. ABLs can also support companies dealing with temporary cash flow volatility, such as a company uncertain about how tariffs might impact its business.
- Transition: “A company that’s making strategic changes may need some capital that’s a little more patient to give them time to make that transformation. An ABL can be a great product to do that,” Fowle said.
Financial rigor
Asset-based lending’s reporting requirements can strengthen companies’ working capital management.
An ABL’s borrowing base generally includes accounts receivable and inventory. But lenders may exclude significantly overdue accounts receivable, meaning late payments can limit available financing.
“If a company is paying attention to that, they’ll be more disciplined about making sure they’re being paid on a timely basis and they’ll be generating more cash flow,” Fowle said. “We’ve seen companies get to a point where they could go to a traditional cash flow loan, but they choose to keep the ABL because of the discipline it has brought to their working capital management.”
Choosing an asset-based lender
Consider these factors when evaluating asset-based lending options:
- Customized approach: The better a lender understands your business, your collateral and your priorities, the more value your ABL can provide. “It’s not a one-size-fits-all approach,” Fowle said. “There are times we can get comfortable providing more flexibility in an area that’s really important to a client because of what we’ve been able to do from a structural perspective.”
- Range of options: Companies can benefit from different types of financing, from ABLs to cash flow loans and direct lending, at different lifecycle stages. A lending team that offers a full menu of options can help you find the ideal solution for your business’s specific needs. “We can move clients from one structure to another based on what gives them the right kind of flexibility to meet their goals and objectives,” Fowle said.
- Service and expertise: J.P. Morgan has dedicated credit, operations and field exam teams focused on asset-based lending to provide clients with experienced support, including cross-border support for companies seeking international ABLs.
- Technology and processes: When you’re reporting on your borrowing base on a monthly or weekly basis, inefficiencies add up. Look for a lender that’s working to ease the effort. “We’re investing a lot of time and attention in technology and our processes to make it simpler for clients and hopefully deliver some value back to them in the way of insights,” Fowle said.
We’re here to help
Discover how J.P. Morgan’s team of bankers and specialists can help you turn assets into working capital with asset-based lending tailored to your needs.
JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/commercial-banking/legal-disclaimer for disclosures and disclaimers related to this content.
