Asset-based lending can be misunderstood – viewed as a last resort rather than a strategic financing tool. In today’s manufacturing environment, where cash flow can fluctuate due to seasonality, inventory cycles and capital investment demands, traditional cash‑flow lending structures don’t always align with operational realities. As a result, many manufacturing business owners are reassessing how their balance sheets – not just earnings – can support growth, resilience, and long‑term objectives.
A closer look at asset‑based lending demonstrates why this flexible financing option is well‑suited for manufacturing operations. With straightforward reporting requirements and a structure tied directly to asset values, asset‑based lending can provide immediate liquidity, support ongoing operations, and help manufacturers remain competitive by unlocking the value already on their balance sheets.
This article provides an overview of asset-based lending, compares it to cash-flow lending structures, and outlines key considerations for manufacturers when selecting a lending team aligned with their business objectives.
Asset-based lending
Asset-based lending is structured around the value of a borrower’s collateral. It typically involves a revolving credit line secured by current assets, such as accounts receivable and inventory. It can be paired with a secured term loan to meet long-term financial needs.
The revolving credit facility provides access to funds based on a set percentage of eligible current assets, enhancing liquidity and supporting daily operations. When combined with a secured term loan, the structure can also fund long-term investments like capital projects or debt restructuring, using fixed assets such as equipment, real estate, or machinery as collateral.
To manage risk, lenders conduct in-depth field audits and asset appraisals to confirm asset values. Although this level of oversight is more rigorous than traditional lending practices, many well-run manufacturers already maintain the necessary data. Others benefit from the improved financial visibility and reporting that this process encourages.
For many owners, asset-based loans are an attractive alternative to traditional business loans, and they continue to gain a wider audience among manufacturers and private equity firms.
Asset-based lending compared with cash-flow loans
Cash-flow loans are based on a company’s enterprise value – often expressed in terms of earnings before interest, taxes, depreciation, and amortization (EBITDA) – rather than the value of the company’s pledged assets. Asset-based loans can offer greater flexibility and capital efficiency compared to cash-flow loans, due to the distinct ways their credit structures are designed.
Cash-flow loans include restrictive covenants like fixed-charge coverage, capital expenditure limits, and leverage requirements, which can restrict borrowing capacity and raise costs if breached. In contrast, asset-based loans are typically less restrictive for manufacturers, offering more flexibility. For example, asset-based loans typically include only a “springing” fixed-charge coverage ratio covenant that is not tested unless loan availability falls below an agreed-upon percentage of the manufacturer’s borrowing base.
Cash-flow loans can be restrictive because they depend on debt and EBITDA, impacted by seasonal and interim changes in earnings, a big factor considering the nature of manufacturing. Asset-based lending is more stable, relying on the borrower’s assets.
For example, a manufacturer operating in a highly seasonal environment found its existing cash flow credit facility increasingly misaligned with its working capital needs. As inventory levels rose ahead of peak production periods, leverage based covenants constrained borrowing availability – despite the presence of significant, high quality inventory on the balance sheet.
By transitioning to an asset based revolving credit facility, the company was able to align borrowing capacity with the value of its assets rather than interim earnings performance. The change effectively doubled available liquidity during peak inventory cycles, providing the flexibility needed to support production demands, manage seasonality and pursue growth initiatives without the constraints imposed by EBITDA driven covenants.
Asset-based loans are typically fully secured with current assets, potentially lowering a manufacturer’s borrowing costs compared to cash-flow loans (which may be unsecured or only partially secured). To achieve optimization, an owner should align credit facilities with its short- and long-term capital needs, and the evaluation process should include an asset-based structure to derive the most flexible solution. Asset-based loans provide liquidity and flexibility, complementing other financial tools such as leases, mortgages, subordinated debt, institutional term loans or high-yield debt. Generally, due to the secured nature of asset-based lending, creditors often feel more comfortable with the higher debt/EBITDA, or balance sheet leverage.
When to consider asset-based credit solutions
Asset-based financing solutions can be both prudent and practical for manufacturers, considering the seasonal and cyclical nature, which often includes cash-flow strains throughout the year. Other reasons for asset-based credit solutions are businesses that expect to experience these situations:
- Companies that plan to expand, either organically or through acquisition;
- Manufacturers that require liquidity as part of an ownership succession financing plan;
- Organizations assuming recapitalizations, refinancing, and restructurings;
- Turnaround situations.
Businesses with strong management teams and disciplined financial reporting capabilities are particularly well-positioned to meet the monitoring requirements of asset-based credit facilities by leveraging a broad array of asset-based lending products, including:
- Secured revolving credit facility against working capital assets;
- Short-term over-advance facilities for seasonal businesses;
- Secured term loan facilities to support long-term assets;
- Senior stretch term loans to support bridge financing.
Choosing the right lending team
Today, many manufacturing companies look to asset-based credit to support business objectives, and selecting the right lending team is critical. The right financial provider can help manufacturers empower assets and fine-tune and develop innovation strategies. Here are some qualifications to look for when choosing a financing provider:
- Knowledge of manufacturing business assets;
- A proven track record in loan structuring;
- A clear understanding of your business;
- A trusted, reliable source of capital;
- A creative approach to big-picture opportunities.
For manufacturing businesses with asset-rich balance sheets – particularly those with meaningful accounts receivable and inventory – asset‑based credit can be an effective and flexible financing solution. When structured appropriately, it can support growth initiatives, ownership transitions and periods of operational change while providing liquidity aligned with the realities of manufacturing cycles. In an environment where flexibility, visibility and alignment matter, asset‑based lending remains a practical and strategic option for manufacturers seeking to put their assets to work.
This article is prepared for general information purposes only. The information contained in this article has been obtained from sources deemed to be reliable but is not represented to be complete, and it should not be relied upon as such. This article does not purport to be a complete analysis of any security, issuer, or industry and is not an offer or a solicitation of an offer to buy or sell any securities.
Banking products and services are offered by KeyBank N.A. All credit, loan, and leasing products are subject to collateral and/or credit approval terms, conditions, and availability, and are subject to change.
The views and opinions expressed are solely those of the author and should not be construed as representing the views or official positions of the Turnaround Management Association.
Michael Panichi is senior vice president and group head of KeyBank Business Capital, a national asset-based lending unit. Michael has over 25 years of combined experience in capital markets and banking in various capacities, including M&A, ownership succession planning and management of distressed debt, encompassing business development and risk management.