Loan types
Asset based lending, and the fixed costs nobody quotes you
A revolver sized off receivables, inventory, and equipment. The rate looks like a bank rate, but monitoring costs are fixed, so low utilization triples what you pay.
Asset based lending replaces the question every bank asks with a different one. A bank asks whether your cash flow can service the debt. An asset based lender asks what your assets would fetch in a liquidation and lends a percentage of that. Cash flow still matters, but it is no longer the gate, which is why companies that lose money can still hold a facility.
The facility itself is a revolver. Every month, sometimes every week, you submit a borrowing base certificate listing eligible receivables, eligible inventory, and any equipment or real estate in the base. The lender applies an advance rate to each category, adds them up, and that total is what you can have outstanding. Draw, repay, draw again.
That structure is why an asset based line grows with the business instead of lagging it. A term loan is sized on last year and stays that size. A borrowing base is recalculated every reporting period, so a company that doubles its receivables in nine months has roughly double the availability nine months later without asking anyone for permission. The trade is that it also shrinks the same way when sales fall, at exactly the moment you would rather it did not.
How a borrowing base is actually built
Advance rates are not negotiable in the way rates are. They come from what an appraiser thinks a liquidator would recover, and they are remarkably consistent across the industry.
| Collateral | Typical advance | Measured against | On our $2,000,000 example |
|---|---|---|---|
| Eligible receivables | 80 to 85 percent | Face value of invoices under 90 days, net of concentration and contra | $1,400,000 eligible gives $1,190,000 |
| Inventory | Lesser of 50 to 65 percent of cost, or 80 to 85 percent of NOLV | An appraiser's net orderly liquidation value, not your cost | $1,200,000 at cost gives $600,000 |
| Machinery and equipment | 70 to 80 percent | Orderly liquidation value from a current appraisal | $800,000 OLV gives $600,000, usually as a term piece |
| Owned real estate | 60 to 70 percent | Appraised value less any prior mortgage | Carved out separately, amortized |
| Total availability | Capped at the committed facility amount | $1,790,000 against a $2,000,000 commitment |
The word that costs owners the most money is NOLV, net orderly liquidation value. It is not what you paid, it is not the number in your accounting system, and it is not retail. It is what a liquidator would net after costs in an orderly sale over several months. Finished goods with a broad resale market appraise reasonably. Work in process, custom parts, branded packaging, and anything perishable can appraise near zero. See orderly liquidation value before you build a projection off your inventory balance.
The cost nobody quotes you up front
The rate is the easy part. Bank asset based facilities commonly price at SOFR plus 2.50 to 6.00 percent. Non bank lenders run 10 to 16 percent. What gets left out of the conversation is that a monitored facility carries fixed annual costs whether you draw or not.
- Interest
- SOFR plus 2.50 to 6.00 percent at banks, 10 to 16 percent at non bank lenders, charged on the drawn balance only
- Unused line fee
- 0.25 to 0.50 percent a year on the undrawn portion of the commitment
- Collateral monitoring
- $2,000 to $5,000 a month, flat, for processing borrowing base certificates and running the lockbox
- Field examinations
- Two to four a year, $1,200 to $1,600 a day plus travel, billed to you
- Appraisals
- $8,000 to $25,000 for inventory and equipment, repeated annually or on request
- Closing costs
- 0.50 to 1.50 percent of the commitment, plus lender legal, which is also yours to pay
Put real numbers on a $2,000,000 facility. Interest at 7.8 percent. Unused fee at 0.375 percent. Monitoring at $3,000 a month, so $36,000 a year. Exams and appraisals at $22,000. That is $58,000 of cost before you borrow a dollar.
At $1,500,000 of average draw the facility costs about $176,900, which is 11.8 percent on the money you used. At $250,000 of average draw it costs about $84,100, which is 33.6 percent on the money you used. Same lender, same rate sheet, same documents. Asset based lending is priced for companies that live on the line, and it punishes companies that keep it as insurance. If you expect to be drawn less than about a third of the commitment on average, price a receivables only facility or a plain line of credit against it first.
Covenants and the reporting load
This is a high maintenance product and the reporting is not optional. Miss the deadlines and you are in technical default even if every payment is current.
- Borrowing base certificate, weekly or monthly, with a receivables aging, a payables aging, and an inventory report attached.
- Monthly financial statements, usually due 20 to 30 days after month end, prepared consistently with the prior month.
- Fixed charge coverage ratio, commonly a minimum of 1.10x to 1.25x, often springing only when availability drops below a set dollar amount or percentage. See coverage ratios for how it is calculated.
- Minimum excess availability, a floor you must keep undrawn. Breaching it usually triggers cash dominion before it triggers anything else.
- Capital expenditure limits and restrictions on distributions, acquisitions, and additional debt.
- Field exam access on demand, plus your cooperation and your books, at your cost.
None of that is a reason to avoid the product. It is a reason to be honest about whether your accounting function can carry it. A company that cannot close its books within 30 days will trip a reporting covenant in the first quarter, and a reporting default gives the lender the right to reprice, restrict, or accelerate. Fix the accounting first, then take the facility.
One more line on that certificate deserves its own warning. Most agreements let the lender establish reserves against the borrowing base at its own discretion, for dilution, for a landlord who will not sign a waiver, for a disputed account, for anything it can articulate. A reserve does not require your agreement and it reduces availability the day it is imposed. Ask during negotiation for reserves to require notice and a stated reason, and get whatever you can into the credit agreement, because you will not get it later.
When asset based lending is the right answer
Three profiles fit this product better than anything else on the market, and they all share one trait: significant assets relative to earnings.
- 01Growing faster than cash flow
Revenue is up 40 percent, receivables and inventory are up with it, and a cash flow lender sizes off last year. An asset based line grows automatically as the collateral grows, which is the whole point.
- 02A turnaround or a loss year
Earnings will not support a term loan but the balance sheet is intact. Asset based lenders will write through a loss year that a bank will not touch, which is why they are the standard exit from a covenant default elsewhere.
- 03An acquisition or a carve out
You are buying assets and need the assets themselves to fund the purchase. Pair the revolver with a acquisition loan and the equity check gets a lot smaller.
The profiles that do not fit are just as clear. Service businesses with no inventory and thin receivables have nothing to build a base from. Companies under roughly $5,000,000 in revenue usually cannot carry the monitoring costs. And any business whose assets are mostly intangible is asking a liquidation appraiser to value something a liquidator cannot sell.
What Exp Capital does with this
Exp Capital Solutions is a broker. We do not run borrowing bases, we do not set advance rates, and we do not approve facilities. What we do is size your collateral honestly before anything goes out, tell you what your inventory is likely to appraise at rather than what it cost, and put the file in front of the asset based lenders whose minimums and industry appetite actually match. When the monitoring costs would swallow the savings, we say the facility is too big for you and point at a receivables line or a term product instead, even though the smaller deal pays us less.