As borrowing conditions tighten and traditional lending becomes more constrained, advisers are increasingly seeing clients explore alternative ways to access liquidity. For business owners and asset-rich clients, asset-based lending (ABL) is emerging as a flexible solution that aligns funding with the value of underlying assets rather than cash flow alone, gaining relevance in a more complex and cost-sensitive borrowing environment.
In this exclusive, Max Griffin, Senior Associate, and Victoria Judd, Partner at Pillsbury, explore how ABL is being used to unlock liquidity amid shifting credit conditions, and why it is becoming an increasingly important consideration for advisers.
While asset-based lending (ABL) has long been a mainstream financing tool in the United States, the UK market has developed more gradually. The product gained traction during the 2008 financial crisis, and several recent market factors have accelerated its adoption as borrowers and lenders look to alternatives to traditional balance sheet lending. According to UK Finance, there was around £150 billion of finance in the ABL sector in 2024.
ABL is a form of lending where the advance is directly linked to a percentage of the borrower’s realisable assets rather than to its cash flow. The borrowing capacity therefore fluctuates with the value of the assets that form the borrowing base.
While inventory and receivables have traditionally formed the collateral pool, the market has evolved to include a broader range of assets such as intellectual property, real estate, distribution rights, motor vehicles, media rights, plant and machinery and other specialised assets.
Basics of ABL
The central feature of an ABL facility is the borrowing base, which determines the maximum amount that a borrower can draw at any time.
Each class of asset is assigned a loan-to-value percentage reflecting the lender’s view of such asset’s recoverability. Receivables that meet pre-agreed eligibility criteria may be advanced at around 80–85% of their value, while less liquid assets attract lower advance rates. Certain receivables, such as those that are overdue, disputed or concentrated with a single customer, may be excluded from the borrowing base entirely.
As assets are collected, sold or revalued, the borrowing base is periodically recalculated and the maximum amount advanced is adjusted accordingly. If asset values decline below the outstanding loan balance, the borrower may need to repay a portion of the facility or provide additional collateral.
This built-in adjustment mechanism is a key distinguishing feature of ABL compared to conventional revolving credit facilities.
Higher interest rates
The most obvious catalyst for the rise of ABL in the UK has been the higher interest rates experienced in the market over the last six years. The Bank of England base rate (often the floor on top on which margin will apply) went from 0.10 in March 2020 to 5.25% in August 2023 before easing to 3.75% in December 2025. When the Bank of England rates are higher, all rates rise, and markets are pushed higher by the higher Bank of England base rate.
Following such a prolonged period of relatively cheap credit, the higher rates have significantly increased debt servicing costs. These higher costs put increased pressure on cash flow, particularly for highly levered businesses. As a result, some borrowers have found it difficult meeting the financial metrics or leverage thresholds required for traditional loans.
In this higher-cost environment, ABL can offer a more flexible lending alternative since credit decisions tend to be driven by the value of the underlying assets rather than by the borrower’s earnings or cash flow generation. For asset-rich borrowers, this can provide access to liquidity that might otherwise be unavailable.
Reduced appetite for highly leveraged loans
Following the periods of economic uncertainty and rising default risk since the 2008 financial crisis, many banks have become more cautious about underwriting highly leveraged loans. Credit committees are increasingly focused on adequate collateral coverage rather than purely earnings-based leverage multiples. While credit availability remains steady for larger companies, SMEs face tighter supply, relying more on challenger banks, alternative lenders and alternative lending solutions.
Asset-based structures offer lenders a different risk profile compared to traditional leveraged loans. Since lending is tied to the liquidation value of identifiable assets which are assessed at pre-agreed intervals, lenders have greater visibility over the collateral supporting their exposure. The eligibility and reporting requirements dictated by the loan agreement allow the borrowing base to increase or decrease, ensuring the lender is never lending above the agreed loan-to-value of their collateral.
This asset-focused underwriting approach makes ABL a more attractive proposition for lenders during periods of economic uncertainty.
Pressure on corporate cash flow
In addition to higher interest rates, some other market conditions which have contributed to the increase of ABL in the UK, include:
- supply chain disruptions due to the pandemic and ongoing military conflicts that have affected inventory levels and production timelines;
- slower customer payment cycles and rising receivables balances; and
- increased operating costs across energy, labour and logistics.
These factors can reduce the predictability of earnings and weaken traditional credit metrics.
ABL structures are particularly well suited to this environment because the borrowing base mechanism allows easy adjustment as receivables and inventory levels fluctuate. As assets grow, the amount the business can borrow increases correspondingly (subject to agreed advance rates and eligibility criteria).
This fluctuation provides asset-rich borrowers with a form of liquidity that is more closely aligned with the working capital cycle of their businesses.
Greater caution in certain sectors
Certain industries, including retail, manufacturing and construction, have experienced volatility recently due to inflationary pressures, changing consumer demand and supply chain instability. According to the recent UK government’s Company Insolvency Statistics, in the 12 months up to September 2025, these sectors were three of the six sectors that faced the highest insolvency rates, so lenders may be hesitant to rely solely on projected earnings when assessing creditworthiness.
However, many businesses operating in these industries are asset-rich, holding significant levels of inventory, receivables, intellectual property, equipment or real estate. In such circumstances, ABL provides lenders with greater comfort by anchoring lending capacity to the value of tangible assets rather than to potentially volatile earnings forecasts.
Outlook
Higher interest rates, ongoing pressure on corporate cash flows and a more cautious credit environment are expected to continue influencing lending decisions in the near to medium term. At the same time, borrowers are increasingly exploring alternative sources of liquidity that can unlock value from their balance sheets.
For asset-rich companies, ABL can provide a flexible and scalable financing solution that adapts to the operational realities of their businesses. As a result, ABL is likely to remain an important and growing component of the UK financing landscape.
