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.  

“This approach lets us provide more flexible covenant terms than you’d probably see with cash flow-based financing, while maintaining competitive pricing,” said Andrew Ray, J.P. Morgan Head of Asset-Based Lending. “Companies get more room to operate their business without restrictive financial requirements.”

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 do require more reporting than traditional loans, most companies find their current finance or treasury teams can handle the requirements, Ray said. 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: “When companies are going through major changes, they often need financing that can adapt to their timeline during that process. ABLs work well for these situations,” Ray said.