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
-
Which Types of Businesses are the Ideal Candidates for Asset-based Financing Solutions?
Read More »: Which Types of Businesses are the Ideal Candidates for Asset-based Financing Solutions?Asset-based financing is a highly flexible solution suitable for a wide range of companies, particularly those with significant tangible assets on their balance sheets. Since these loans focus on the value of collateral rather than credit history alone, the ideal…
-
What Types of Company Assets are Typically Accepted as Collateral for Asset-based Lending?
Read More »: What Types of Company Assets are Typically Accepted as Collateral for Asset-based Lending?In asset-based lending (ABL), financing is secured by the tangible value of a company’s balance-sheet assets. The most common types of company assets accepted as collateral include: Accounts Receivable: Businesses can borrow against unpaid invoices, typically receiving an advance rate…
-
How is the Borrowing Base Calculated in an Asset-based Lending Facility?
Read More »: How is the Borrowing Base Calculated in an Asset-based Lending Facility?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…
-
How does Asset-based Lending Differ from Traditional Cash-flow-based Bank Loans?
Read More »: How does Asset-based Lending Differ from Traditional Cash-flow-based Bank Loans?Asset-based lending (ABL) and traditional cash-flow-based bank loans differ primarily in their underwriting focus and accessibility. While both provide capital, they rely on different indicators of a business’s strength to determine eligibility. Key differences include: Primary Collateral: ABL is secured…
-
What are the Primary Benefits of Using Asset-based Lending for Corporate Growth and Expansion?
Read More »: What are the Primary Benefits of Using Asset-based Lending for Corporate Growth and Expansion?Asset-based lending (ABL) serves as a strategic financing pillar for corporate growth by allowing businesses to leverage their tangible assets—such as accounts receivable, inventory, and equipment—to secure flexible capital. Unlike traditional loans that depend heavily on credit history or cash-flow…