Insights · Asset-based lending

Asset-based lending: how a borrowing base is set and why it moves

Certus Credit · 9 November 2026 · 5 min read

A term loan is sized once, on the day it closes, off what the business earned last year. An asset-based line is sized every month, off what the business is owed and what it holds in stock today. For a distributor, a manufacturer or a staffing company, that difference is the whole point.

Collateral first, earnings second

An asset-based lender lends against two things it can count and, if it has to, collect: receivables and inventory. Equipment can be added as a separate piece. Earnings matter, but they are the second question. The first is what the collateral would be worth if the lender ever had to turn it into cash.

Receivables are the better collateral and get the higher advance rate, typically 80 to 85 percent of the eligible balance. Inventory is harder to sell and gets 40 to 60 percent of cost, or a percentage of what an appraiser says it would fetch in an orderly liquidation. Those percentages, applied to the eligible collateral, produce the borrowing base: the most the business can have drawn on any given day.

What eligible means

Not every invoice counts. The lender's definition of eligible sits in the credit agreement, and it decides more about the facility than the headline advance rate does.

Invoices past 90 days from invoice date come out. If a customer has more than half its balance past 90, the rest of that customer's invoices come out too, on the theory that the customer is the problem and not the invoice. Any one customer is capped at a share of the total, often 20 or 25 percent, and the balance above the cap is ineligible. Invoices to related companies come out. Invoices to customers outside the United States come out unless they are credit insured. Progress billings, retainage, invoices with a right of return, and invoices to customers who also sell to the business are usually out or reserved against.

On the inventory side, work in progress is almost always excluded, slow-moving and obsolete stock is excluded, and consigned goods are not the borrower's to pledge.

A distributor's base, worked through

Take a building products distributor with $4.2M of receivables and $1.6M of inventory at cost, on a $4M committed line.

The aging: $2,100,000 current, $1,150,000 at 31 to 60 days, $560,000 at 61 to 90, and $390,000 past 90.

The $390,000 past 90 is ineligible. One customer owes $180,000, of which $120,000 is past 90, so under the cross-aging rule its remaining $60,000 comes out as well. The largest customer owes $1,250,000, just under 30 percent of the total, and the cap is 25 percent, so $200,000 above the cap is ineligible. Invoices to a sister company come to $75,000. A Canadian customer owes $140,000 and there is no credit insurance on it. Ineligibles total $865,000, eligible receivables are $3,335,000, and at 85 percent that is about $2,835,000 of availability.

Inventory: of the $1.6M, $300,000 is work in progress and $200,000 has not moved in a year. Eligible inventory is $1,100,000, and at 50 percent it adds $550,000.

The borrowing base is $3,385,000. The line is committed at $4M, but the business can draw $3,385,000 and not a dollar more. With $2.6M already outstanding, there is $785,000 to draw this month.

That calculation is the borrowing base certificate. The borrower prepares it, monthly or weekly depending on the lender and the size of the line, with the aging attached. Twice a year, give or take, the lender's field examiner comes in and tests it: invoices against shipping documents, the aging against cash receipts, the inventory count against the books.

Why the base moves

A good month raises it. Ship $600,000 more than you collect and, after ineligibles, availability rises by roughly $500,000. The line funds the growth as it happens, which a term loan sized last January cannot do.

A bad month lowers it just as fast. If one customer's $400,000 slides past 90 days, $340,000 of availability disappears on the next certificate, and if the business was drawn near the top of the base, the lender will want the difference back. Concentration cuts the other way too. Land a large new account and part of its balance may sit above the cap, earning nothing against the line until the rest of the customer base catches up around it.

For a seasonal business that movement is the attraction. A distributor that builds inventory through the summer and sells it down in the autumn needs most of its money for four months of the year. A term loan sized to the peak leaves cash idle and interest running for the other eight. A term loan sized to the average leaves the business short in September. An asset-based line rises with the stock and falls as it sells, and the interest follows the need.

When a term loan is the better tool

Asset-based lending works when the collateral is there to count. A service business paid at the point of sale has no receivables to lend against. A contractor whose billings are progress draws with retainage held back will find most of its paper ineligible. A business whose customers pay in 15 days has little outstanding at any moment, and the base will be small however healthy the company. On smaller facilities the fixed cost of field exams and monthly reporting weighs heavily, which is one reason this lane sits above $2.5M.

For those businesses a cash-flow term loan, sized off earnings with a coverage test, does the job with less reporting. For a distributor, a manufacturer or a staffing company carrying $3M or more of receivables, the asset-based line is usually the cheaper and more flexible instrument, and often the only one that grows with the company.

Reading your own aging

The aging and the inventory listing already say what an asset-based lender would lend. Before any enquiry, an owner can run the exercise above on their own numbers and see roughly where the base lands. Where it lands low, the fix is often in the aging itself: a collections push on the 61 to 90 column, a conversation with the one customer over the cap, credit insurance on the foreign account.

If you want that read done properly, the enquiry at certuscredit.com/apply asks about the business, the receivables and the inventory. We will tell you plainly what the base looks like and whether this is the right structure.