In an asset-based facility, the loan is sized against collateral, not the credit story: “a lender extends credit — typically a revolving line of credit — sized against a calculated value of the borrower’s eligible receivables and inventory, rather than primarily against the business’s overall financial statements or credit rating.”
The borrowing base is built collateral category by category. Certain receivables drop out of the calculation before a dollar is advanced — “accounts that are significantly overdue, owed by related parties, or concentrated too heavily in one customer”. Inventory goes through the same screen, “often excluding obsolete or slow-moving stock”. The lender then applies its own advance methodology to whatever collateral survives that screen: there is no fixed industry-wide rate; each facility agreement sets its own methodology for the deal in front of it.
Priority is not automatic. the lender registers its security interest under the Personal Property Security Act (PPSA) to establish and protect its position against other creditors — the same PPSA machinery that secures a general security agreement on the same corporation’s assets. A buyer financing a receivables- and inventory-heavy acquisition — the article names manufacturers, distributors and wholesalers specifically — is the natural ABL candidate; a target with little on its balance sheet besides people and contracts usually is not.
ABL is also not the same instrument as the Canada Small Business Financing Programme (CSBFP). The programme finances the purchase of specific eligible assets at closing, priced against cost or appraised value, then the loan amortises on a fixed schedule. An ABL facility is a revolving line that is redrawn as the borrowing base moves — useful post-closing working-capital financing for a business whose receivables and inventory swing with the season, which a term loan is not built to track.
Say a buyer is financing the acquisition of a distributor with $1,200,000 of eligible receivables and $600,000 of eligible inventory after the exclusions above are applied. In this facility agreement the lender sets an advance rate of 75 percent against eligible receivables and 40 percent against eligible inventory — figures this particular lender chose for this deal, not a published rate. The resulting borrowing base is $900,000 (75 percent of $1,200,000) plus $240,000 (40 percent of $600,000), for $1,140,000 of available credit the day the facility opens — before any covenant or DSCR test is applied on top of it.
See also: cash-flow lending, debt service coverage ratio and general security agreement.
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