Asset based lending: one facility secured on debtors, stock and machinery

Asset based lending is a revolving facility secured on a business's working assets, usually trade debtors plus stock, plant and machinery, and sometimes property, with the amount available recalculated regularly as those assets change. It is built around an invoice finance facility, with further lending layered on top against other assets.

Each asset class is valued and given its own advance level. Debtors are usually the core and attract the highest advance. Stock is valued by specialists, often on what it would realise in an orderly sale, and attracts a lower advance because it is harder to turn into cash. Plant and machinery is valued by independent valuers and is often funded as a term loan element within the facility, repaid over a set period. Commercial property can sometimes be added as a further term element. The lender combines these into one facility, usually with one set of documents and one relationship.

The borrowing base is the total value of eligible assets after the lender's advance levels are applied, and availability is how much of that you can draw at any moment after reserves and existing drawings. It is the number finance teams watch most closely.

Eligible assets exclude items the lender will not fund, such as debts well past due, connected-party sales, disputed invoices, slow-moving or obsolete stock, work in progress and goods held on consignment. The lender may also hold back reserves, for example for rent arrears, unpaid VAT or PAYE that could rank ahead of it in an insolvency, or retention of title claims by suppliers. Debtor availability usually updates daily or weekly as you report invoices and receipts. Stock availability is typically recalculated monthly from stock reports, with periodic revaluations.

Illustration only. The figures are round and hypothetical. A distributor has £2,000,000 of eligible debtors, £1,000,000 of eligible stock and machinery valued at £500,000. After the lender's advance levels and a small reserve, the borrowing base might be around £2,200,000. If £1,800,000 is already drawn, availability is around £400,000. If debtors rise in a busy month, availability rises too.

ABL usually suits larger, established businesses with a meaningful asset base, several years of accounts and a finance function that can produce accurate, timely reporting. Typical users include manufacturers, wholesalers and distributors, engineering and industrial businesses, and companies serving other businesses on credit terms. It is often relevant to the kind of businesses covered on our finance for large businesses page.

It is less suitable for businesses with few tangible assets, such as consultancies with a small ledger, retailers selling for cash, or early-stage companies. The setup costs, audits and reporting also make it less efficient for small facilities. In those cases invoice finance on its own, stock finance or a simpler loan may fit better.

Many businesses arrive at asset based lending because they have outgrown a patchwork of separate facilities. A typical position is an overdraft with the bank, an invoice discounting line with another funder, hire purchase on several machines and supplier credit stretched to the limit. Each lender takes its own security, sets its own covenants and sees only part of the picture, which can leave assets unused as security and make renewals slow.

An ABL facility can replace several of these with one agreement, one set of reporting and one lender that understands the whole balance sheet. The transition needs planning. Existing lenders must be repaid and release their charges, notice periods on current facilities have to be served at the right time, and finance agreements on individual machines may need settling or leaving in place outside the new facility. It is worth mapping every existing facility, its notice period and any early settlement cost before you start.

Field audits are on-site reviews in which the lender's team tests the information behind the borrowing base, and they continue for the life of the facility. Before completion, the lender usually commissions a debtor audit, stock valuation and plant and machinery valuation. Afterwards, audits are typically carried out a few times a year, depending on the lender and the size of the facility. Auditors test invoices against delivery records, check reconciliations, review credit notes and verify stock counts. You will also provide regular reports: debtor and receipts information, monthly stock reports, management accounts and covenant certificates.

ABL facilities usually carry lighter financial covenants than a cash-flow term loan, because the lender relies mainly on the assets. Common covenants include minimum availability (a buffer you must keep undrawn), a fixed charge cover test, limits on capital expenditure, and restrictions on dividends or further borrowing. Some are tested only when availability falls below a set level. Breaching a covenant can lead to reduced advances, extra fees or, in serious cases, the lender calling the facility in, so build headroom into your forecasts.

An ABL facility typically takes around four to ten weeks from initial discussions to drawdown. The audits and valuations take time to schedule and complete, legal documentation is more involved than for a single product, and existing lenders may need to agree to release security. Refinancing several facilities or funding an acquisition usually sits at the longer end. Clean reporting and fast responses to the lender's questions help.

Asset based lenders usually take a debenture with fixed charges over book debts, plant and machinery and any property, and a floating charge over stock and other assets. Debts are assigned to the lender. Personal guarantees are less common on larger facilities than on smaller loans, but many lenders ask for warranties from directors about the accuracy of information, and some request limited guarantees. Where other lenders hold security, an intercreditor or priority deed sets out who ranks where.

ABL pricing generally combines an interest charge on the money drawn, usually set as a margin over Bank of England base rate, with a service or management fee covering the administration of the facility. The debtor element may carry its own service fee in the same way as invoice finance, while term elements against plant and property carry interest on the outstanding balance. There are usually arrangement fees, valuation and audit fees, legal costs, and sometimes an unused line fee on headroom you do not draw. Facilities often have a minimum term and early termination charges. Compare total cost against the likely average drawing rather than the headline limit.

If ABL is more than you need, or does not fit your assets, consider:

• Invoice finance on its own, which is simpler and suits a wider range of businesses
• Stock finance for funding inventory specifically
• Asset refinancing or plant and machinery finance to release or fund equipment
• Mezzanine finance to sit behind senior debt where a deal needs more capital