Asset-Based Lending Glossary of Terms
Accounts Receivable - Money owed a business for merchandise or services bought
on open account. Accounts receivable arise from the business practice of providing
a customer merchandise or a service with the expectation of receiving payment per
Advance - A drawdown or disbursement of funds according to the terms of an
existing loan agreement.
Advance Rate - The maximum percentage that the lender will lend against a
type of collateral.
Aging (Schedule) - A periodic report listing a borrower’s accounts receivable
or payable balances, by customer or supplier, detailing the current status or delinquency
of the balances owed or owing. Such reports are usually used in determining the
borrower’s compliance with the borrowing base requirements in the loan agreement.
Asset-Based Lending - A specialized form of secured lending whereby a company
uses its current assets (accounts receivable and inventory) as collateral for a
Availability - The additional funds that the lender will advance under the
terms of the credit facility. The amount is often the difference between the loan
commitment amount and the outstanding balance of the credit facility..
Blanket Assignment - An agreement giving the lender a security interest in
all of assets owned by the borrower.
Borrowing Base - A collateral base, agreed to by the borrower and lender,
which is used to limit the amount of funds the lender will advance the borrower.
The borrowing base specifies the maximum amount that can be borrowed in terms of
collateral type, eligibility, and advance rates.
Compliance Certifications - The borrower’s statement certifying its adherence
to the terms of the loan agreement during the stated period. Credit Memo - A detailed
memorandum forwarded from one party or firm to another granting credit for returned
merchandise, some omission, overpayment, or other cause.
Cross-Collateralized - In the event of default, the collateral of cross-collateralized
loans is used to satisfy the debts.
Cross Default - The right to declare a loan in default if an event of default
occurs in another loan.
Debtor-in-Possession (DIP) Financing - Financing provided to a borrower after
a chapter 11 (reorganization) bankruptcy filing. A lender provides the DIP post-petition
financing to support its working capital needs while the DIP attempts to rehabilitate
its financial condition and emerge from bankruptcy protection.
Eligible Collateral - A defined term in the loan agreement that controls
what collateral can be included in the borrowing base.
Factoring - An arrangement in which a company shortens its cash cycle by
selling its accounts receivable without recourse to a third party, known as a “factor.”
A factor assumes the full risk of collection, including credit losses. There are
two basic types of factoring: (1) discount factoring, in which the factor discounts
the receivables prior to the maturity date, and (2) maturity factoring, in which
the factor pays the client the purchase price of the factored accounts at maturity.
Formula - A calculation to determine the borrowing base in which a margin
or advance rate is applied to each type of collateral.
Ineligible Collateral - Pledged receivables or inventory that does not meet
the criteria specified in the loan agreement. Ineligible collateral remains part
of the ABL lender’s collateral pool, but does not qualify for inclusion in the borrowing
Lien - A legal right granted by the authority of a court to control or to
enforce a charge against another’s property until some legal claim is paid or otherwise
Liquidation Value - The most likely price an asset will bring if it is sold
without reasonable market exposure and when the seller is under duress.
Lock Box - A cash management product offered by financial institutions that
accelerates a client’s collection of receivables.
Non-notification - The bank does not notify the borrower’s pledged accounts
that they are to remit payments directly to the bank. Non-notification often involves
a lock box arrangement. The bank may also allow the borrower to collect payments
and remit them to the bank for credit against the loan balance.
Notification - The bank notifies a borrower’s pledged accounts that they
are to remit payments directly to the bank for collection.
Operating Cycle - The period of time it takes a business to convert purchased
and manufactured goods and services into sales, plus the time to collect the cash
from the associated sales.
Pari Passu - Credit facilities in which two or more lenders are accorded
equal treatment under a loan agreement. Most frequently applied to collateral, but
may also refer to loan structure, documentation, maturity, or any other substantive
Purchase Money Security Interest (PMSI) - The Uniform Commercial Code (UCC)
prescribes that if a creditor provides financing for a debtor to acquire specific
goods, the creditor can perfect a security interest in the goods despite the existence
of financing statements on similarly described collateral.
Revolving Credit Facility - A loan agreement that allows the borrower to
frequently draw down and repay advances. The proceeds are usually used to support
the working capital needs of the borrower.
Security Agreement - A document giving a lender a security interest in assets
pledged as collateral. This agreement, signed by the borrower, describes the collateral
and its location in sufficient detail so the lender can identify it, and assigns
to the lender the right to sell or dispose of the assigned collateral if the borrower
is unable to pay the obligation.
Set-off - A common law right of a lender to seize deposits owned by a debtor
and deposited in the lender’s institution for nonpayment of an obligation.
Uniform Commercial Code (UCC) - A model framework of laws that addresses
Working Investment - The result of calculating the sum of accounts receivable
and inventory, minus the sum of accounts payable and accrued expenses (excluding
taxes). It represents the amount of financing and trade support that a company needs
to fund its trading assets.