How to Spot a Strong ABL Transaction (and Why It Matters to Investors)
“Since 1999, we’ve reviewed thousands of lending opportunities—and passed on many. The reason? Discipline.”
Not all collateral is created equal in asset-based lending, especially revolving lines of credit. While prospects (and their advisors) are often eager to rush into term sheets, seasoned lenders know that what looks fundable isn’t always what performs when things get complicated.
At our firm, we’ve built a strategy grounded in experience. With over 25 years of lending behind us and more than $5 billion funded, we’ve learned to ask the questions others overlook—because that’s how investor capital stays protected.
This week’s blog offers a closer look at how we qualify a revolver transaction. It’s not a checklist—it’s a mindset.
The First Rule: Cash Conversion is King
We lend against assets. But really, we lend against the likelihood that those assets will quickly and reliably convert into cash.
Let’s take accounts receivable as an example.
Which of the following would you want backing your investment?
A receivable tied to a delivered product, with a strong payment history, no returns, no offsets, and regular trade terms?
A similar product—but one that is often returned?
A product that hasn’t shipped yet, but has already been invoiced?
A receivable that includes services still pending (like installation)?
A receivable from a long-term project that’s incomplete?
Scenario #1 is the dream—clean, verified, proven. Everything else is not necessarily off the table, but it raises red flags we need to investigate and structure around.
A common theme emerges here: it’s not just about what was invoiced but also when, how, and under what conditions it gets paid. Investors often ask how we protect the downside. This is how: with forensic-level diligence and deal-by-deal structuring that doesn’t assume anything.
Inventory: The Other Side of the ABL Equation
Inventory often complements A/R in an asset-based revolver but carries different nuances.
We ask one key question: Could we sell this tomorrow, and to whom?
Finished goods that are packaged and ready to ship have clear value—but only if they are not customer-specific.
In-process goods or inventory missing labels or packaging might be technically “finished,” but costly to liquidate.
Perishable, seasonal, or highly customized inventory can look good on a balance sheet and be worthless in a wind-down.
Understanding the resale path of every asset is essential. We’ve seen more than a few transactions where “high-quality inventory” became expensive storage problems because no one else wanted it.
Systems That Tell the Truth
Even perfect collateral is meaningless without trustworthy reporting. That’s why we examine a company’s internal systems, especially inventory and receivables tracking.
We need to know their reports are accurate, timely, and real. A company operating without a perpetual inventory system that updates in real time can’t provide the transparency we require to lend, let alone protect investor capital.
Beyond Collateral: Credit Still Matters
While collateral is the heart of ABL, traditional credit fundamentals remain critical:
Can the company generate enough cash flow to service debt and operate?
Is management experienced and credible?
Is there a realistic plan for stabilization or growth?
Are they aligned with trends in their sector and the broader economy?
Our underwriting process weaves all of this together, not as a box-ticking exercise but as a way to preserve value throughout every cycle.
Why It Matters to Investors
Every ABL transaction we fund is backed by a combination of strong collateral, sound reporting, and credible management. But most importantly, it’s supported by judgment. The kind that comes from doing this every day since 1999.
We don’t chase yield. We don’t overextend. We structure carefully and conservatively, knowing that protecting downside builds long-term, compounding returns.
That’s why we’ve never had a negative rolling 12-month return since inception—and why investors continue to trust us with their capital.
