What is the difference between asset-based and cash flow lending?
The collateral, and therefore the question the lender is answering. A cash flow lender is underwriting a stream: it lends a multiple of EBITDA and takes security over the shares and assets of the business mostly so that it controls the outcome if the stream stops. An asset-based lender is underwriting a pile: it lends a percentage of specific, identifiable, liquidatable assets, and the security is the point rather than the backstop.
That distinction gets lost because both term sheets use the word secured. In practice they behave differently in every phase. Sizing is different: one is a multiple, the other is a formula. Reporting is different: a cash flow facility typically tests quarterly, an asset-based facility recalculates availability monthly or weekly off a borrowing base certificate. Enforcement is different: a cash flow lender negotiates, because its recovery depends on the business continuing, while an asset-based lender can look at a collateral pool and know roughly what it is worth without the business attached.
The two are also not the same thing as asset-backed finance, which is the fund-level industry that has grown up around lending against contractual and hard-asset cash flows. US asset-based finance in the broadest sense is sized at roughly $30 trillion, around twenty times corporate direct lending, with banks holding about 90% of it (Blackstone Office of the CIO, 1 July 2026, attributing the sizing to McKinsey, September 2024). The private, non-bank slice of that is a different and much smaller number: roughly $6.1 trillion globally, projected at $9.0 to $9.2 trillion by 2029 (KKR, restated by Macfarlanes, 28 May 2026). Those two figures measure different populations and should never be added together or used interchangeably.
What is fair to say is that the private slice has become the largest single thing in private credit. Asset-based finance is now larger than all other private credit markets combined (DLA Piper, Private Credit Pulse Q1 2026). A middle-market borrower is meeting these lenders because capital arrived, not because the borrower changed.
What does a lender actually advance against each asset?
Less than the asset is worth, and much less than the balance sheet says. Eligible receivables carry advance rates of 80% to 85%. Inventory blends to about 50%, but the blend hides a wide spread: finished goods at 50% to 60% of net orderly liquidation value, raw materials at 40% to 55%, and work in progress typically excluded altogether or advanced at 30% to 40%. Machinery and equipment runs 50% to 75% of orderly liquidation value (ABF Journal, 1 June 2026, and PeerSense Capital Advisory, 1 July 2026).
Two words in that paragraph do the heavy lifting. Eligible means the lender's definition, not the accounting definition: receivables past a stated age, owed by a related party, subject to offset, owed from outside agreed jurisdictions, or concentrated in one obligor beyond a cap are struck out before any percentage is applied. Net orderly liquidation value means what a third-party appraiser thinks the inventory fetches in a controlled sale, which is not what it cost.
So the arithmetic runs in two steps, and the first one is the one borrowers skip. Gross assets become eligible assets after the exclusions and reserves. Eligible assets become availability after the advance rate. A business with $10m of receivables and $8m of inventory does not have $18m of collateral. It has whatever survives step one, multiplied by the rates above, less the reserves the lender holds back for dilution, rent in landlord states, taxes and priority claims.
The gap between committed and available is visible in the market data. Committed asset-based lines across the surveyed lender population stood at $310.4bn in the first quarter of 2026, up 2.2% year over year, while utilization ran at 39.1% (Secured Finance Network, Q1 2026 ABL Survey, released 1 July 2026). Some of that is deliberate liquidity insurance. Some of it is borrowing base that exists on the commitment letter and not on the certificate.
| Collateral | Advance rate | Applied to |
|---|---|---|
| Eligible receivables | 80% to 85% | Face value after exclusions and dilution reserve |
| Inventory, blended | About 50% | Net orderly liquidation value |
| Inventory, finished goods | 50% to 60% | Net orderly liquidation value |
| Inventory, raw materials | 40% to 55% | Net orderly liquidation value |
| Inventory, work in progress | Excluded, or 30% to 40% | Net orderly liquidation value |
| Machinery and equipment | 50% to 75% | Orderly liquidation value |
“Borrowers negotiate the advance rate because it is the number in the term sheet. The eligibility definitions and the reserves sit three schedules further back, they are rarely negotiated, and they decide more of the availability than the rate does.”
Why does secured paper price inside a term loan?
Because the recovery question is answered before the loan funds. A cash flow lender recovers by selling or restructuring a going concern, and what that is worth is unknown until it happens. An asset-based lender has an appraisal, a monitoring cadence and a collateral pool it has already discounted twice. The price reflects that.
The spread evidence is direct. Bank asset-based revolvers price at SOFR plus 350 to 650, and lower-middle-market asset-based revolvers at SOFR plus 200 to 350 (PeerSense Capital Advisory, 1 July 2026, and CT Acquisitions, Q2 2026; both are practitioner sources and should be read as indicative rather than surveyed). The sharpest illustration is a single publicly reported financing in July 2026, where the same borrower carried a $375m asset-based revolver at SOFR plus 125 against a $735m term loan B at SOFR plus 200 (ABF Journal, 27 July 2026). Same company, same balance sheet, same week, 75 basis points apart on nothing but what the paper is secured against.
Compare that to the cash flow ladder in the same market. A borrower below $10m of EBITDA pays S+350 to 425 for bank senior cash flow debt and S+550 to 750 for unitranche (SPP Capital Partners, Market At A Glance, July 2026). Asset-based capacity is cheaper than either, and it is also smaller, more administratively demanding and unavailable to a business whose value is not in things.
That last point is the constraint most borrowers meet. Asset-based lending suits distribution, manufacturing, staffing and anything else carrying real receivables and real inventory. A software business with $2m of receivables and no inventory does not have an asset-based option at any price, which is why the migration of middle-market borrowers toward asset-based and non-bank lenders (ABF Journal, 1 June 2026) is sector-selective rather than general.
What is happening to collateral values right now?
The inventory line is under pressure, and it is the line that moves availability fastest. Inventory cost has risen roughly 15% on average on tariff effects, turns have slowed, and liquidation values have not followed cost upward. The widening divergence between cost basis and net orderly liquidation value is the defining borrowing base issue of the second half of 2026 (ABF Journal, Q2 2026).
That divergence is mechanical and it works against the borrower twice. Higher cost means more cash tied up in the same physical inventory. A flat or lower liquidation value means the advance rate applies to a smaller number than the ledger shows. Availability falls while working capital need rises, which is the exact sequence that turns an undrawn facility into a liquidity event.
Credit performance in the asset class has moved with it. Non-accruals across the surveyed asset-based population ran 1.38% in the first quarter of 2026, up 42 basis points year over year, and roughly triple the 0.33% to 0.56% band that held from the second quarter of 2023 through the fourth quarter of 2024 (Secured Finance Network, Q1 2026 ABL Survey, 1 July 2026). That is a low absolute number and a steep relative move, and both readings are true.
Lender sentiment has split along the same line. Confidence among bank asset-based lenders fell 7 points to 55, while confidence among non-bank lenders rose 9 points to 67, the highest reading in more than three years (Secured Finance Network, Q1 2026). New business tells the same story from the other side: gross new commitments fell 59.5% quarter over quarter to $4.04bn even as total committed lines grew.
Who is funding this, and does it change the terms?
Capital is arriving in size, and it is arriving from balance sheets with long liabilities. In a survey of 405 insurance chief investment officers and chief financial officers representing more than $14 trillion of balance sheet assets, 36% planned to increase allocations to asset-based finance and 58% planned to increase private credit overall (Goldman Sachs survey via ABF Journal, 13 April 2026). One manager raised $12.7bn across an asset-based strategy in under six months, with a single fund closing at an increased $8.5bn hard cap (Reuters and Private Debt Investor, 10 to 12 June 2026).
For a borrower this cuts both ways. More capital chasing collateral means more lenders will look at a mid-sized facility that a bank would have declined on relationship grounds, and it means competition on advance rates at the margin. It does not mean looser eligibility. Insurance-backed capital is buying predictability, and predictability in this asset class is manufactured by the reserves and the monitoring, not relaxed by them.
The practical read for a business with real collateral is that an asset-based facility is now a serious alternative for the revolver and often for part of the term debt, at a price inside anything a cash flow lender will quote. The cost is administrative: appraisals, field examinations, a borrowing base certificate on a fixed cadence, and a facility whose size moves with the balance sheet rather than sitting still between refinancings.
The cost that is easier to miss is optionality. A cash flow facility that is drawn is drawn. An asset-based facility can shrink in the quarter you need it most, because the same conditions that hurt trading also hurt collateral. Sizing liquidity off peak availability rather than off trough availability is the single most common error we see in the structure.
As of August 2026
Sources: ABF Journal, 1 June 2026, for advance rates by asset class and the migration of middle-market borrowers toward asset-based lenders; ABF Journal, Q2 2026, for the tariff effect on inventory cost, turns and liquidation value; ABF Journal, 27 July 2026, for the reported asset-based revolver and term loan B pricing on a single borrower; PeerSense Capital Advisory, 1 July 2026, and CT Acquisitions, Q2 2026, for indicative asset-based revolver spreads, both practitioner sources; SPP Capital Partners, Market At A Glance, July 2026, for the cash flow senior and unitranche comparison; Secured Finance Network, Q1 2026 ABL Survey, released 1 July 2026, for committed lines, gross new commitments, utilization, non-accruals and lender confidence; Blackstone Office of the CIO, 1 July 2026, for US asset-based finance sizing and the bank share, attributing the sizing to McKinsey, September 2024; KKR, restated by Macfarlanes, 28 May 2026, for private global asset-based finance sizing and the 2029 projection; DLA Piper, Private Credit Pulse Q1 2026, for the comparison against other private credit markets; Goldman Sachs survey via ABF Journal, 13 April 2026, for insurance allocation intentions; Reuters and Private Debt Investor, 10 to 12 June 2026, for asset-based fundraising. The $30 trillion, $6.1 trillion and private credit figures measure different populations and are not additive. No surveyed source publishes single-obligor concentration caps or dilution reserve conventions as a market series, and none is asserted here.