Asset-based lending (ABL) is credit secured by balance-sheet collateral. The borrower draws against a revolving facility sized to a formula — for example, 80% of eligible accounts receivable plus 50% of eligible inventory — with the lender holding a security interest in those assets.

How it works

The company submits borrowing base certificates showing receivables aging, inventory counts, and payables. The lender applies advance rates and reserves for ineligible accounts (over 90 days past due, concentrated customers, intercompany balances). If receivables shrink, the available line shrinks; the company may need to pay down or pledge additional assets.

Covenants focus on collateral quality rather than EBITDA in early ABL. Field exams and audits are common. Interest rates sit above bank prime or SOFR with spreads reflecting customer concentration and industry.

Venture debt often pairs with equity rounds and includes warrants; classic ABL from commercial finance companies targets operational companies with tangible working capital cycles. Some later-stage startups blend both.

Why it matters

• Founders: ABL funds inventory builds and seasonal swings without giving up board seats. Misprojecting receivables quality triggers sudden covenant breaches.
• Investors: Non-dilutive capital extends runway but sits senior to equity in liquidation. Understand intercreditor terms if venture debt and ABL stack.
• Operators: Finance must run clean AR aging and inventory records — sloppy books block draws.

Common mistake

Treating ABL like flexible venture debt with loose covenants. ABL lenders haircut quickly when customers slow-pay; founders accustomed to patient VC boards face weekly collateral calls.

Related ideas

Venture debt, receivables financing, working capital line, and /glossary/billings versus collected cash.