Asset-Based Lending

Intro

Asset-based lending (ABL) is one of the oldest and most stable forms of business financing. Unlike revenue-based loans or merchant cash advances that bet on future sales, ABL is secured by tangible assets—primarily accounts receivable (AR) and inventory. This makes it a time-tested option for businesses that need working capital without the tight payback periods or over-leverage risks of newer fintech products.

ABL originated in the 1960s as factoring and evolved into a mature product. To understand ABL, you first need to understand its roots in factoring.

What is Factoring?

Factoring is a financial transaction where a business sells its accounts receivable (invoices) to a third party, known as a factor, at a discount in exchange for immediate cash. This provides businesses with quick access to working capital without waiting for customers to pay their invoices, which can often take 30, 60, or 90 days.

I recognize factoring from the real estate industry, where it's possible to buy a "note" at a discount, offering a personal financier immediate cash and relief from having to maintain payments.

Recourse vs Non-Recourse Factoring

In non-recourse factoring, the factor assumes the risk of non-payment by the customer, while in recourse factoring, the business remains liable if the customer fails to pay.

Non-Recourse Factoring Example

Riviera Finance is a factoring company that specializes in non-recourse factoring, particularly for small to mid-sized businesses. In this setup, they advance up to 95% of the value of net-30 invoices within as little as 24 hours, assuming the risk of customer non-payment due to insolvency or other credit issues.

For instance, if a business sells a $100,000 invoice, Riviera might advance $95,000 upfront, handle collections, and absorb any loss if the customer defaults, charging a higher fee (typically 2–4%) to account for the risk. This is ideal for industries like trucking or manufacturing where bad debt protection is valuable.

Recourse Factoring Example

RTS Financial (part of RTSinc) offers recourse factoring, commonly used in the trucking and transportation sectors, where the business retains responsibility for unpaid invoices. They provide advances on invoices with flexible terms, but if the customer fails to pay (e.g., within 90 days), the business must buy back the invoice or repay the advance.

For example, on a $100,000 freight invoice, RTS might advance 90% ($90,000) at a lower fee (1–3%), but the business bears the risk and handles any repurchase if the debtor defaults. This option is more affordable but requires strong customer credit checks by the business.

Factoring vs ABL

Factoring is different from ABL due to its specific focus on Accounts Receivable (AR), whereas ABL will also look at inventory or other assets as collateral.

The other main difference in ABL from traditional factoring is that factoring was structured around one-off invoice sales, whereas ABL tends to be structured as revolving lines of credit.

Factoring remains a subset of ABL, often used by smaller or early-stage businesses with limited assets beyond receivables.

Factoring vs Debt Collection

How do collection agencies function, and how does that compare to factoring? Does a collection agency buy debt from a company or are they merely contracted to collect the debt? Both are actually valid models:

Contracted Collection: The creditor doesn't transfer ownership of the debt and instead pays a commission for collected debts (25%–50%). This is typical for newer debts where recovery is more likely.

Debt Buying: The creditor sells the debt outright to a collection agency at a significant discount (pennies on the dollar). In this case, the collector keeps 100% of what they collect.

Factoring sounds a lot like debt buying! So how exactly is a collection agency different from a factor?

Key Differences

Aspect	Factoring	Debt Collection
Primary function	Financier—provides immediate cash	Collector—recovers overdue debt
Ownership of debt	Factor always purchases the invoices	Collectors typically don't buy debt (debt buyers are a niche subset)
Timing	Preemptive, to manage cashflow for growing businesses	Reactive, when debt is already distressed
Financing speed	Quick, sometimes within 24 hours	Payment comes after debts are collected
Risk	In recourse factoring, original brand retains risk; in non-recourse, factor assumes risk	Collection agencies are relatively risk-free—no collection, no money owed

Managing Customer Relationships with a Factor

It's kind of odd for you as a customer to buy something from one company and then get called by another for the invoices (a factor). On one hand, this creates a nice departmental separation so you can maintain a good relationship with the actual seller and then be more matter-of-fact when handling payment minutiae, especially if it gets messy or delayed. On the seller side, as long as the fees are reasonable, delegating the tedious process of collecting invoice payments can be nice.

But this begs the question: how are customer relationships handled once a factor gets involved?

Standard Factoring vs Invoice Discounting

You can delegate your collections process to a factor in many cases, but there are also scenarios where you retain control over collections while still receiving an advance against your invoices. This depends on the type of arrangement:

Standard Factoring (with collections): The factor handles collections and your customers know about it. Costs 1–5% of invoice value due to added services.

Invoice Discounting (confidential/non-notification factoring): You retain control over collections, customers don't know about the factor. Typically cheaper (0.5–3%) since you handle collections yourself.

How ABL Works as a Revolving Line

Modern ABL is typically structured as a revolving line of credit against receivables and inventory. This allows brands to:

1. Draw down funds for supplier payments
2. Repay from collections
3. Draw again as new receivables come in

This structure is ideal for widget-based businesses needing working capital without tight payback periods. Unlike one-off factoring transactions, a revolving ABL facility grows with your business—as your receivables and inventory increase, so does your available credit.

When ABL Makes Sense

ABL is particularly well-suited for:

• DTC brands transitioning to omni-channel: When you start getting large POs from retailers like Sephora or Target ($250K–$500K orders), you need capital to fulfill them
• Seasonal businesses: Draw more during inventory buildup, pay down during strong sales seasons
• Companies with strong assets but variable cash flow: Your AR and inventory provide the collateral, not your profitability
• Businesses between $5M–$50M revenue: This is the sweet spot where ABL scales well but traditional bank debt may be harder to access

ABL Costs

ABL typically costs in the high single digits to mid-teens in annual percentage rate—significantly cheaper than revenue-based financing (high teens to low 20s%) or merchant cash advances (which can hit 50–150%+ effective APR).

The cost depends on:

• Quality of your receivables (who owes you money)
• Inventory type and liquidation value
• Your credit and business history
• Size of the facility

Why ABL Has Stood the Test of Time

Unlike innovations like revenue-based loans, payables-based loans, or merchant cash advances (MCAs), ABL is "time-tested" and resilient to market volatility. Lenders have come and gone due to volatility in the DTC space, but ABL providers with a focus on not over-leveraging businesses have remained stable.

The key insight: when things go south, ABL lenders have tangible assets to recover. This alignment of incentives means they're less likely to push you into debt traps compared to lenders betting purely on your revenue projections.