In an asset-based lending (ABL) facility, the borrowing base is calculated by applying specific advance rates to the appraised value of a company’s pledged assets. This calculation is typically refreshed on a monthly basis to reflect the current value of the collateral.
The amount a business can borrow is determined by the type and quality of the assets being leveraged:
- Accounts Receivable: Typically command the highest advance rates, often ranging from 80% to 90% (or up to 85% for revolving lines).
- Inventory: Generally secures lower advance rates, typically between 50% and 70% of its appraised value.
- Equipment: Loans are usually structured based on 70% to 80% of the equipment’s appraised value.
- Purchase Orders: In specific purchase order financing structures, the advance can reach up to 100% of the PO value.
This collateral-focused approach allows the credit limit to fluctuate—expanding as the asset base grows—providing flexible liquidity that is not solely dependent on the company’s cash flow or credit history.
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