In an asset-based lending (ABL) arrangement, the loan-to-value (LTV) ratio is not a fixed percentage. Instead, it is a dynamic figure that reflects a lender’s confidence in recovering principal by liquidating pledged collateral.
The primary factors that determine these ratios include:
- Asset Class and Liquidity: Lenders apply different advance rates based on how easily an asset can be converted to cash. Accounts receivable are highly valued (70–90%) due to their liquidity, while inventory is lower (40–60%) because of risks like obsolescence and physical degradation.
- Eligibility Criteria: Not all assets qualify for the borrowing base. Lenders exclude specific items, such as receivables older than 90 days, foreign accounts without credit insurance, or inventory that is work-in-progress.
- Concentration Limits: Lenders often cap exposure to a single customer (typically at 20–30% of the total pool) to protect against catastrophic loss if one large debtor defaults.
- Appraisal and Valuation Methodologies: Third-party appraisals determine the value of physical assets. Equipment is often valued at orderly liquidation value (typically 50–80%), while real estate is based on professional appraisals and environmental assessments (typically 60–75%).
- Asset Quality and Performance: Dilution analysis (measuring returns and allowances) and turnover velocity also impact the final credit capacity extended by the lender.
Related FAQs
-
What is Supply Chain Risk Management?
Read More »: What is Supply Chain Risk Management?Based on the provided content, supply chain risk management is a strategic function focused on identifying, assessing, and mitigating disruptions within a supply network. It is framed as a critical component of supply chain management (SCM) that transforms logistics from…
-
What is the Difference between Supply Chain Financing and Traditional Factoring?
Read More »: What is the Difference between Supply Chain Financing and Traditional Factoring?Supply chain financing and traditional factoring differ primarily in their initiation, cost structure, and the credit profile used to secure funding. Supply chain financing is a buyer-led initiative that leverages the buyer’s superior credit rating, resulting in a lower cost…
-
How does Supply Chain Financing Benefit both Buyers and Suppliers?
Read More »: How does Supply Chain Financing Benefit both Buyers and Suppliers?Supply chain financing provides mutual benefits to both buyers and suppliers by optimizing working capital and strengthening their business relationship. For buyers, the programs allow them to extend payment terms and preserve liquidity without straining the financial health of their…
-
How does a Company Determine if Supply Chain Financing is the Right Capital Strategy?
Read More »: How does a Company Determine if Supply Chain Financing is the Right Capital Strategy?To determine if supply chain financing is the right capital strategy, a company should conduct a thorough internal readiness assessment focusing on several key performance indicators. First, analyze your cash conversion cycle; a high days sales outstanding (DSO) or the…
-
How can Supply Chain Financing Help a Company Optimize its Working Capital?
Read More »: How can Supply Chain Financing Help a Company Optimize its Working Capital?Supply chain financing (SCF) helps companies optimize their working capital by allowing buyers to extend their payment terms without straining their supplier relationships. Through buyer-led programs, organizations can effectively manage their cash conversion cycle and improve financial liquidity in several…