In an asset-based loan, your availability is a formula, and the lender writes the formula. The revolver is sized to a borrowing base, typically a percentage of eligible accounts receivable plus a lower percentage of eligible inventory, less reserves the lender can impose. The headline commitment matters less than how eligibility, reserves, and advance rates are defined, because those terms decide how much cash you can actually draw in a bad month. We represent companies in manufacturing, distribution, consumer products, and technology negotiating ABL facilities and living under them, with particular attention to how IP and software fit into the collateral package.
How An ABL Facility Works
Asset-based lending suits companies with substantial working capital assets and cash flow that swings with seasons or customer cycles. Instead of relying mainly on financial maintenance covenants, the lender relies on collateral it can monitor and, if needed, liquidate. The borrower delivers borrowing base certificates, usually monthly and more often when availability is tight, and the lender sends field examiners to test receivables and appraisers to value inventory. Many ABL facilities have only a springing fixed charge coverage ratio that applies when excess availability falls below a threshold. The tradeoff is reporting: an ABL borrower lives with much closer lender oversight than a cash flow borrower does.
Article 9 And Eligibility Rules
The legal foundation is UCC Article 9. The lender takes a security interest in accounts, inventory, deposit accounts, and general intangibles, perfects it by filing a financing statement in the borrower's state of organization, and perfects in deposit accounts by control through deposit account control agreements. The commercial terms sit in the eligibility definitions. Receivables are commonly ineligible if more than 90 days past invoice date, owed by an affiliate or an uninsured foreign customer, subject to offset, or concentrated in one customer beyond a cap. Inventory is commonly ineligible if in transit, held by a third party without a bailee letter, slow moving, or consigned. Every ineligibility category reduces your availability.
Negotiating The Borrowing Base
We negotiate the terms that drive availability: advance rates, eligibility criteria, concentration limits, and, most important, the lender's discretion to impose reserves. A right to establish reserves in the lender's permitted discretion should be tied to conditions that actually affect collateral value, with notice before reserves take effect. We also negotiate the cash dominion trigger. Most borrowers can keep control of their collections until excess availability drops below a set level or an event of default occurs, at which point the lender sweeps cash daily. For technology companies, we address whether software, patents, and subscription receivables are included, and how a lien on IP interacts with customer licenses and open source obligations.
Disputes Over Availability And Liquidation
ABL disputes usually start with a sudden cut in availability: a new reserve, a reclassification of receivables as ineligible, or a field exam that revalues inventory. A borrower that loses availability in the middle of a production cycle can be pushed toward default quickly. We review whether the lender acted within the agreement and the implied covenant of good faith, and we negotiate an overadvance or forbearance where that is the realistic path. If a lender moves to collect, we handle disputes over notification of account debtors, repossession, and whether a disposition of collateral was commercially reasonable under UCC Section 9-610, along with deficiency claims and borrower remedies under Section 9-625.
Avoiding Common ABL Mistakes
Before signing, run your actual receivables aging and inventory reports through the proposed eligibility definitions. The gap between gross assets and eligible assets surprises many borrowers. Build the reporting calendar into your finance team's workflow, since a late or inaccurate borrowing base certificate can be an event of default on its own. Keep records clean ahead of field exams, including credit memos, customer disputes, and intercompany balances. Negotiate a cure period before cash dominion springs, and a dollar threshold that reflects your real seasonal low point. And if you plan to license or sell IP, confirm the credit agreement permits nonexclusive licenses in the ordinary course without lender consent.
