Asset-Based Lending

Inventory, valued at what it would realize in an orderly liquidation rather than at cost, with advance rates that reflect how quickly it turns and how specialized it is. Equipment, valued by appraisal and depreciated over the facility. Receivables, often combined with inventory in one borrowing base. Where a borrower also holds digital assets, those can be included under the custody and valuation rules of the digital asset facilities, giving a single facility across a mixed balance sheet.

Availability under the facility is the sum of eligible collateral in each class multiplied by its advance rate, less reserves for known risks: landlord and warehouse liens, payroll and sales taxes, dilution, seasonality, and any rent or royalty that would rank ahead of the lender at a liquidation. Eligibility rules strip out what a liquidator could not sell or collect, such as slow-moving or obsolete inventory, work in progress, consigned goods, and receivables that fail the tests described under receivables financing. The borrower delivers a borrowing base certificate, a signed schedule of eligible collateral, ineligibles, reserves and resulting availability, weekly or monthly as the documents require, and may draw up to the availability it shows. If outstandings exceed the base, the over-advance must be cured by paydown within a set number of days. The base moves with the business, expanding as inventory and receivables grow and contracting as they shrink, so the loan is never larger than the collateral supports.

An asset-based lender verifies its collateral in person. A field examination, performed before closing and on a fixed cycle after it, is a collateral audit: examiners roll the receivables aging forward to test turnover and dilution, trace a sample of invoices to shipping documents and cash receipts, test inventory counts and margins, confirm that payroll and sales taxes are current, and compare everything the borrowing base certificate asserted with what the books and the warehouse show. Inventory and equipment are appraised by independent specialists at inception and periodically, and the value the lender advances against is net orderly liquidation value, what the assets would fetch in a managed sale over a reasonable period after the costs of the sale, not book value and not forced-sale value. Discrepancies reduce the borrowing base directly. This is more intrusive than a cash-flow loan, and it is what makes a higher advance against physical assets prudent.

Collections are directed to a lockbox in the lender’s control or to the borrower’s accounts under deposit account control agreements, and swept to the revolver daily, with the borrower re-drawing as needed. Under full dominion the sweep runs from day one; under springing dominion the borrower keeps its cash until a trigger, typically an event of default or availability falling below a set floor, after which the lender takes control. In normal conditions the sweep is a formality; in stress it means the lender is repaid from the collateral’s own cash before the borrower can use it elsewhere.

The facility is secured by a blanket lien on all personal property, perfected by a UCC-1 financing statement filed in the borrower’s jurisdiction of organization after a clean lien search, with prior liens paid off against payoff letters and terminated by UCC-3. Two carve-outs are watched for. An equipment vendor or lessor that finances a specific asset can hold a purchase-money security interest that ranks ahead of the blanket lien in that asset if it is perfected within the statutory window after delivery, so the borrowing base excludes assets subject to one. And inventory held at third-party premises is exposed to the landlord’s or warehouse operator’s lien for unpaid rent or fees, so a landlord waiver or a bailee letter is obtained, or a reserve is taken. Titled vehicles are perfected by notation on the certificate of title rather than by financing statement. Where a term lender shares the borrower, an intercreditor agreement gives Wesvel first priority in the working-capital collateral and defines its rights in the rest.

Asset-based facilities rely less on financial covenants than cash-flow loans, because the borrowing base does most of the work, but they are not covenant-free. A fixed charge coverage ratio is typically tested monthly or quarterly, often springing into effect only when availability falls below a floor, and a minimum availability or minimum liquidity covenant keeps a cushion between the loan and the base. Reporting cadence is set to the collateral’s velocity: borrowing base certificates weekly for a fast-turning receivables book, monthly for slower inventory, with agings, inventory reports and financial statements on their own schedule.