Credit availability expands as sales grow and excess cash flow automatically reduces the credit line.Confidence in the value of the collateral, robust monitoring of asset turnover, and capture of the collateral proceeds in a control account or lock box to pay down the credit line combine to allow the lender to have a near real-time understanding of both the state of the borrower and the loan.As illustrated in the adjacent diagram, ABL lenders provide credit at different points in the working capital cycle with advances being paid down with cash receipts.Among ABL's most attractive attributes is the lack of a set amortization schedule.Twenty years ago, most ABL lenders were independent of banks.
The concept of advancing credit against working capital assets is predicated on the continuous turnover of the cash cycle such that advances against the most liquid assets of the business–inventory and accounts receivable– become self-liquidating as a matter of course. According to their promoters, there are five simple steps to building a huge fortune in a couple of days: Well, this is how is supposed to work anyhow. It doesn't, for obviously as you can see above there are several critical flaws -- probably the most important being that nobody is going to loan you from 0 million to 0 million unless you're Bill Gates or some lesser billionaire, or a publicly-traded corporation with lots of assets to seize if you default. Just walk into your local major bank and tell them you would like to take out a 0 million loan; and don't mind that jacket they give you with the long sleeves, they're just being courteous. What self-liquidating loans are (these are also sometimes called "Arbitrage Loans") is best explained by how they purportedly work.The first and third categories tend to be potent ABL collateral, while the other two buckets rarely provide much borrowing capacity.The underwriting of an inventory loan tends to be a careful estimate of the likely value of salable inventory on a net orderly liquidation value ("NOLV")1 basis.