Plain definition
Asset-based lending uses specified business assets to support a borrowing facility. Receivables and inventory are common examples. The lender values eligible assets under agreed rules and applies advance percentages to calculate a borrowing base: the amount those assets support.
Available borrowing can therefore change even when the headline facility limit stays the same. Overdue receivables, obsolete inventory, or a concentration of exposure to one customer may reduce eligibility.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Suppose a facility has a limit. Eligible receivables of support an 80% advance, while eligible inventory of supports 50%. The borrowing base is before any other reserves. If drawings are already , only remains available under these assumptions.
If the inventory becomes ineligible, the borrowing base falls to . Existing drawings then exceed it by , potentially requiring repayment or extra collateral under the agreement.
| Receivables borrowing capacity | |
|---|---|
| Inventory borrowing capacity | |
| Existing drawings | |
| Remaining availability |
Book value is not automatically eligible collateral value. The agreement controls valuation, availability and corrective requirements.
Why it matters
A fixed facility limit can create false comfort. Falling collateral quality can reduce access to funding at the same time as collection or stock problems tighten cash.
Practical consequence
Maintain a reconciled schedule of eligible assets, exclusions, advance rates, reserves, and current drawings. Recalculate it at the required reporting dates and before large commitments. Stress-test slower collections and inventory write-downs, and check how quickly any borrowing-base shortfall must be cured.