Common ABL Terms of Interest to Borrowers:
Below is a comprehensive list of the most common terms in asset based lending of interest to borrowers. This content is in draft form and may be subject to change.
Accounts Receivable (receivables) - Category: Collateral & Borrowing Base Terms
Definition: Amounts owed to a company by customers for goods or services delivered on credit. Often used as collateral in asset-based lending.
Description: Accounts receivable represent unpaid invoices from customers, forming a key asset for businesses. In asset-based lending, these receivables serve as collateral, allowing companies to borrow against them to improve cash flow.
Accounts Receivable Financing - Category: Collateral & Borrowing Base Terms
Definition: A financing method where a business borrows against its accounts receivable to access working capital.
Description: This type of financing helps businesses convert outstanding invoices into immediate cash by using accounts receivable as collateral. It is often used to manage short-term cash flow needs.
Advance Rate - Category: Loan Structure & Repayment Terms
Definition: The percentage of eligible collateral that a lender is willing to finance.
Description: Lenders determine advance rates based on risk assessment, typically financing 70-90% of receivables and 50-60% of inventory value.
After-Acquired Collateral - Category: Collateral & Borrowing Base Terms
Definition: A clause ensuring that any new assets acquired by the borrower after the loan agreement are automatically included in the lender’s collateral.
Description: This provision ensures that any assets acquired by the borrower post-loan agreement automatically become part of the lender’s security, reducing credit risk and enhancing collateral coverage.
Asset-Based Loans (ABL) - Category: Collateral & Borrowing Base Terms
Definition: Loans secured by collateral, such as accounts receivable, inventory, or equipment, rather than by cash flow.
Description: ABL is a common lending structure where businesses obtain financing by pledging tangible assets. It is often used by companies with high-value assets but inconsistent cash flow.
Asset-Based Securitization (ABS) - Category: Collateral & Borrowing Base Terms
Definition: The process of pooling financial assets and issuing securities backed by them to raise capital.
Description: ABS enables businesses to convert illiquid assets into marketable securities, providing a mechanism to raise funds while diversifying financial risk.
Balloon Payment - Category: Loan Structure & Repayment Terms
Definition: A large, final payment due at the end of a loan term, often after smaller periodic payments.
Description: This structure lowers initial payments but requires the borrower to make a lump-sum payment at maturity, often necessitating refinancing or a sale of assets.
Bankruptcy Code (Chapter 11, Chapter 7, Chapter 13) - Category: Legal & Compliance Considerations
Definition: Legal frameworks that govern business and personal bankruptcy proceedings.
Description: These U.S. bankruptcy laws provide structured processes for debt restructuring (Chapter 11), liquidation (Chapter 7), and repayment plans (Chapter 13).
Borrowing Base Certificate (BBase or BBC) - Category: Collateral & Borrowing Base Terms
Definition: A document submitted by the borrower that reports the value of eligible collateral, determining the maximum borrowing capacity.
Description: A key compliance document in ABL, the borrowing base certificate helps lenders assess the borrower’s available collateral and set loan limits accordingly.
Cash Collateral Account - Category: Loan Structure & Repayment Terms
Definition: An account in which a borrower’s cash is held as security for the loan.
Description: Lenders use cash collateral accounts to secure loan obligations, ensuring liquidity for debt repayment in case of financial distress.
Cash Flow Lending - Category: Cash Flow & Liquidity Management
Definition: A type of financing based on expected future cash flows rather than physical collateral.
Description: Cash flow lending relies on a company’s ability to generate revenue rather than tangible assets, making it suitable for businesses with strong earnings but limited collateral.
Collateral (security) - Category: Collateral & Borrowing Base Terms
Definition: Assets pledged by a borrower to secure a loan, reducing the lender’s risk.
Description: Collateral is an asset pledged by a borrower to provide security for a loan, ensuring the lender has recourse in case of default. It can include real estate, inventory, or accounts receivable.
Collateral Control - Category: Collateral & Borrowing Base Terms
Definition: The lender’s ability to monitor and manage the pledged assets.
Description: Lenders implement collateral control measures such as audits, field examinations, and tracking mechanisms to safeguard their interests and reduce default risk.
Collateral Reserve - Category: Collateral & Borrowing Base Terms
Definition: A portion of the borrower’s collateral or funds held back by the lender to mitigate potential risks such as depreciation.
Description: This reserve serves as a buffer to account for potential reductions in collateral value, ensuring sufficient security coverage for the lender.
Covenant - Category: Loan Structure & Repayment Terms
Definition: Conditions set by a lender that a borrower must comply with throughout the loan term.
Description: Financial and operational covenants help lenders monitor a borrower’s financial health, including debt ratios and minimum liquidity requirements.
Credit Check - Category: Credit & Financial Risk Assessment
Definition: A lender’s review of a borrower’s credit history to assess repayment ability.
Description: A credit check evaluates a borrower’s creditworthiness by analyzing past borrowing behavior, outstanding debts, and repayment history.
Credit Report - Category: Credit & Financial Risk Assessment
Definition: A detailed report of a borrower’s credit history, including outstanding debts and payment behaviors.
Description: Credit reports, generated by agencies like Experian, Equifax, and TransUnion, provide insights into a borrower’s financial reliability and risk profile.
Current Ratio - Category: Credit & Financial Risk Assessment
Definition: A liquidity ratio comparing current assets to current liabilities to assess financial health.
Description: The current ratio measures a company’s ability to cover short-term obligations, with higher values indicating stronger liquidity.
Days Cash Outstanding (DCO) - Category: Cash Flow & Liquidity Management
Definition: A measure of how long it takes a company to collect receivables.
Description: DCO helps assess the efficiency of a company’s collections process, with shorter durations indicating better liquidity management.
Debt (liability) - Category: Loan Structure & Repayment Terms
Definition: The total financial obligations owed by a business, including loans, bonds, and leases.
Description: Understanding total debt is crucial for financial planning and risk assessment, as high leverage can impact borrowing costs and solvency.
Debt Service - Category: Loan Structure & Repayment Terms
Definition: The total amount required to cover principal and interest payments on outstanding debt.
Description: Debt service includes scheduled loan repayments, often measured through the debt service coverage ratio (DSCR) to assess repayment ability.
Debt-to-Equity Ratio - Category: Credit & Financial Risk Assessment
Definition: A financial metric showing the proportion of debt compared to shareholder equity.
Description: A high debt-to-equity ratio suggests greater financial leverage, which can amplify returns but also increases risk exposure.
Debtor In Possession (D.I.P.) Financing - Category: Loan Structure & Repayment Terms
Definition: A special type of financing available to companies undergoing bankruptcy that allows them to continue operations.
Description: D.I.P. financing provides critical liquidity to distressed companies under Chapter 11, enabling continued operations while restructuring debt.
Deposits In Transit - Category: Cash Flow & Liquidity Management
Definition: Cash payments that have been received but not yet reflected in the bank statement.
Description: These represent pending transactions, often from remote deposits or interbank transfers, affecting cash flow reconciliation.
Discounted Rate of Return - Category: Cash Flow & Liquidity Management
Definition: A valuation method used to assess the cost of capital for investment decisions.
Description: This calculation discounts future cash flows to present value, helping businesses evaluate investment profitability.
Documentary Letters of Credit / Export Letters of Credit - Category: Legal & Compliance Considerations
Definition: Financial instruments used in international trade to guarantee payment under specific conditions.
Description: These trade finance tools help mitigate payment risks in cross-border transactions by ensuring compliance with agreed terms.
EBITDA - Category: Credit & Financial Risk Assessment
Definition: Earnings Before Interest, Taxes, Depreciation, and Amortization—used to assess profitability.
Description: EBITDA is a widely used measure of operational performance, providing insight into a company’s profitability before non-operational expenses.
Equitable Subordination - Category: Legal & Compliance Considerations
Definition: A legal doctrine allowing courts to prioritize claims in a bankruptcy case.
Description: This principle enables courts to adjust creditor rankings, often demoting claims based on misconduct or inequitable conduct.
Fictitious Invoices / Bogus Invoices - Category: Credit & Financial Risk Assessment
Definition: Fraudulent invoices created to inflate receivables, potentially leading to default if discovered.
Description: These fraudulent documents misrepresent accounts receivable, often used to obtain higher borrowing limits in asset-based lending.
Field Examination (Audit) - Category: Credit & Financial Risk Assessment
Definition: A lender-initiated review of a borrower’s financial records to verify collateral and financial stability.
Description: Field examinations help lenders ensure the accuracy of financial statements, assess collateral value, and identify risks in a borrower’s operations.
Financial Statement - Category: Credit & Financial Risk Assessment
Definition: Documents outlining a company’s financial performance, including balance sheets and income statements.
Description: Financial statements provide a comprehensive view of a company’s assets, liabilities, revenues, and expenses, aiding decision-making by lenders and investors.
Five C’s of Credit (5 C’s) - Category: Legal & Compliance Considerations
Definition: A framework used by lenders to assess borrowers based on Character, Capacity, Capital, Collateral, and Conditions.
Description: This credit evaluation model helps lenders determine borrower risk and lending terms based on financial and personal factors.
Fixed Charge Coverage - Category: Loan Structure & Repayment Terms
Definition: A financial ratio measuring a borrower’s ability to cover fixed costs, such as lease and interest payments.
Description: A higher fixed charge coverage ratio indicates greater financial stability and ability to meet fixed obligations.
Floating Rate - Category: Credit & Financial Risk Assessment
Definition: An interest rate that fluctuates over time based on a benchmark, such as LIBOR or SOFR.
Description: Floating rates adjust periodically based on financial market indices, impacting loan costs and borrower repayment obligations.
Forbearance Agreement - Category: Loan Structure & Repayment Terms
Definition: An agreement between lender and borrower allowing temporary relief from loan payments due to financial hardship.
Description: Forbearance agreements help struggling borrowers avoid default, often modifying terms to provide temporary financial relief.
Foreclosure - Category: Loan Structure & Repayment Terms
Definition: The legal process where a lender takes control of collateral due to borrower default.
Description: Foreclosure laws vary by jurisdiction, but typically involve lender repossession of assets securing a defaulted loan.
Fraudulent Conveyance - Category: Legal & Compliance Considerations
Definition: A transfer of assets made to defraud creditors, which can be legally reversed.
Description: Courts can void fraudulent transfers if assets were moved to evade debt obligations, protecting creditors from unfair losses.
Freight Collect / Freight Out / Freight In - Category: Cash Flow & Liquidity Management
Definition: Shipping terms defining when transportation costs are paid and who is responsible for them.
Description: These terms specify which party bears shipping expenses, affecting cash flow and cost accounting in trade transactions.
Full Payment Lease - Category: Loan Structure & Repayment Terms
Definition: A leasing agreement where ownership transfers to the lessee after all payments are completed.
Description: A full payment lease, or capital lease, functions similarly to a financed purchase, with the lessee acquiring ownership at the end of the term.
Government Receivable - Category: Collateral & Borrowing Base Terms
Definition: Accounts receivable owed by government entities, often subject to additional verification requirements.
Description: Government receivables may be seen as lower risk due to government backing but often involve stringent compliance and verification requirements before financing approval.
Guarantor Mortgage / Guaranty - Category: Loan Structure & Repayment Terms
Definition: A personal guarantee provided by business owners or third parties to secure loan repayment.
Description: A guaranty increases lender security, often requiring a business owner’s personal assets as collateral in case of default.
Inventory Financing - Category: Collateral & Borrowing Base Terms
Definition: A type of asset-based lending where inventory is used as collateral to secure a loan.
Description: This financing allows businesses to leverage unsold inventory to access working capital, commonly used by wholesalers, retailers, and manufacturers.
Liens (Blanket Lien, Basket Lien, Chattel Mortgage) - Category: Collateral & Borrowing Base Terms
Definition: Legal claims on a borrower’s assets that secure a lender’s interest in case of default.
Description: Liens provide legal protection to lenders, ensuring they have a claim over a borrower’s assets in case of non-payment. Blanket liens cover all assets, while basket liens cover specific ones.
Loan Default & Remedies (Cross Default, Cross Collateralization, Fraudulent Conveyance, etc.) - Category: Loan Structure & Repayment Terms
Definition: Legal and financial consequences when a borrower fails to meet loan obligations, potentially triggering actions such as foreclosure or liquidation.
Description: Default provisions include acceleration clauses, foreclosure, asset seizure, and cross-default clauses that trigger penalties across multiple loans.
Retention of Title - Category: Legal & Compliance Considerations
Definition: A legal principle ensuring that a supplier retains ownership of goods until payment is made.
Description: Used in trade and lending agreements, this clause ensures sellers maintain legal rights to goods until full payment is received.
Retention of Title - Category: Collateral & Borrowing Base Terms
Definition: A contractual clause allowing a supplier to retain ownership of goods until payment is received.
Description: This provision ensures that a supplier maintains legal ownership of goods until full payment is made, reducing credit risk in commercial transactions.
Working Capital - Category: Cash Flow & Liquidity Management
Definition: The difference between current assets and current liabilities, measuring short-term financial health.
Description: A positive working capital indicates a company’s ability to meet short-term obligations, essential for operational stability.