In today’s volatile financial landscape, asset-based lending stands out as a resilient and adaptable solution for both borrowers and lenders. The data says it all: according to SFNet’s Annual Asset-Based Lending Survey, losses on asset-based lending loans have averaged less than 10 basis points per year over the past three years. Unlike unsecured lending, ABL is anchored in tangible collateral (receivables, inventory, equipment, and more) providing a layer of security that is especially valuable when markets are unpredictable. But the true strength of ABL lies not just in the assets themselves, but in the discipline and oversight embedded throughout the lending process.

Trip Wires and Early Warning Systems

ABL’s security is rooted in its “trip wires”—the regular checks, reconciliations, and audits that catch problems before they escalate. These mechanisms are not just procedural; they are strategic tools for risk management.

As Arif Bhalwani of Third Eye Capital notes, “The real payoff in credit comes from being early, not necessarily right, but alert to inconsistencies others dismiss. Detecting weakening vendor terms, slippage in reporting, or unexplained shifts in working-capital dynamics rarely feels like discovery at the time. Yet those are the small clues that, in aggregate, warn that a company’s financial narrative no longer matches its economic reality.” This vigilance—watching for subtle signals and acting on them—is the hallmark of disciplined ABL.

Donald Clarke,president of Asset-Based Lending Consultants, emphasized the critical role of thorough field exams: “Field examinations today are far more analytics driven, extending the trip-wire concept deep into the borrower’s operational data. Examiners are not just validating numbers; they are interpreting behavior within the data, looking at patterns in liquidity generation, sales trends, dilution, inventory performance, cash gaps, accounts payable activity, vendor behavior, and even shifts in reporting rhythm to surface borrower stress much earlier than in the past.”

He went on to point out the effects of borrowers’ evolved tech capabilities: “At the same time, borrower technology has transformed the monitoring landscape. API-driven reporting delivers more information, but it also demands greater skepticism, which is why effective monitoring now relies on a blend of AI and HI—human intelligence—grounded in real ABL experience. Digital data is not inherently clean; it still requires judgment, and the real advancement is lenders’ ability to cross-test systems, compare timestamps, and identify inconsistencies with a level of precision that simply was not possible a decade ago.”

Stephen Beriau emphasizes the importance of legal and operational discipline:
“Perfecting your security interest with a credit agreement drafted by seasoned commercial finance counsel is the most important step. They are specialists in any agreement that focuses on collateral. Lenders will also use their diligence procedures to detect double pledging by completing new business surveys and sticking to a recurring audit schedule. Cash reconciliations, accrual reviews, verifications and comparisons of sales journals to AR agings can also identify when assets have been moved off balance sheet.”

Technology has amplified these capabilities, but Beriau cautions that “it takes an experienced collateral analyst or relationship manager to catch a fraud. These teams will use their borrowing bases, cash reconciliations, and roll-forwards to also identify changes within a borrower’s collateral. They will also work closely with field exam teams to test these materials on a deeper basis. These onsite exams can make it more difficult to mask a misrepresentation of the collateral.”

The Human Element

While automation and software are indispensable, the human layer remains critical. Jennifer Palmer of JPalmer Collective describes a process that blends technology with hands-on oversight:

“Our diligence process starts with independent appraisal and third-party verification of both accounts receivable, inventory and accounts payable. We don’t just confirm that invoices exist — we confirm that goods were actually shipped, received, and billed correctly. This dual verification helps uncover mismatches between AR and AP early, which can be an indicator of either data integrity issues or misrepresentation.”

Palmer’s team supplements this with comprehensive field exams every six months, going beyond financial reconciliation to test-count inventory, review system access, and validate underlying support for collateral values. “The goal is to confirm that what’s represented on paper exists in reality.”

During the life of the loan, discipline is maintained through ongoing monitoring:
“We require a borrowing base certificate (BBC) with every funding request and again at month-end, supported by detailed agings, general ledger data, bank statements and sales reports. Every movement of collateral is reconciled to the penny. This ensures not only accuracy, but also early visibility into trends, such as stretched payables or slowing collections, that could signal risk.”

Palmer’s ethos is clear: “Technology streamlines data flow, but judgment and experience still catch what algorithms can miss. We maintain an ethos of ‘verify, then trust — and verify again.’”

Preventing and Detecting Double Pledging

Double pledging—when the same asset is used as collateral for multiple loans—is a risk in ABL. Providers deploy a range of tools to prevent and detect it.

Palmer explains: “We file our UCC financing statement as soon as a term sheet is executed, before we even close the loan, to lock in our interest early. From there, we perform a comprehensive UCC search to confirm lien priority and any existing claims. We then use an ongoing monitoring platform that alerts us in real time to any new UCC filings related to the borrower or its affiliates.”

Betty Hernandez of SLR Business Credit and president of the Secured Finance Networkadds, “We use a service called corporate tracker by CSC. Whenever a lien is filed on a borrower we get a notice. We can then order updated searches and get copies of the UCCs filed. Nonetheless, when you are renewing the credit facility it is good practice to order searches to ensure that you didn’t miss any alerts and another lender has filed a lien. We also perform Lexus/Nexus searches that will alert us if a lawsuit has been filed.”

Sydnee Breuer of Rosenthal Capital Group reinforces the importance of continuous monitoring: “To prevent and detect instances of double pledging, we not only do pre-funding and post-funding UCC searches, but we have continuous monitoring of UCC filings of our borrowers. This allows us to be notified in instances where liens have been filed against any of our borrowers. We also monitor for suits and judgments as well as tax deficiencies.”

Clarke added, “As multi-product structures proliferate, the biggest risk is assuming the collateral is yours without proving it. That makes disciplined due diligence non-negotiable—from full UCC searches to confirming existing claims on receivables, fixed assets, or inventory, and ensuring the lender is not quietly sitting behind another secured party or an IRS tax lien. It also requires careful attention to the vendor base, which is often the real backbone of working-capital support and a leading indicator of stress.”

Technology and Third-Party Audits: Enhancing Security and Traceability

ABL providers are leveraging technology and third-party audits to enhance security and traceability. Real-time data access, automated alerts, and proprietary platforms are now standard.

Palmer highlights the role of technology: “Technology has become an indispensable part of our monitoring process. Real-time visibility is critical, so we don’t just rely on periodic bank statements — we have the ability to view clients’ operating accounts directly. Having a springing DACA (deposit account control agreement) on the operating account is a key control feature that ensures we maintain oversight while allowing the borrower to function efficiently.”

Third-party auditors provide another layer of assurance. “The examiners are experts and do this all the time so, while they may not have seen it all, they have seen a lot. It is critical to hire top field examiners and have them go regularly, but if you suspect trouble, then to go in early and often. Their verification work goes across customer bases, confirming invoice authenticity, payment status, and inventory existence. Physical test counts, done in person, remain a cornerstone of true collateral verification.”

Jason Shanahan of Tiger Capital Group describes a disciplined framework: “During the initial diligence phase, Tiger validates underlying collateral values, including accounts receivable (A/R), inventory, and non–working capital assets, through field exams and appraisals. When appropriate, we engage Tiger Valuation Services to conduct inventory valuations or verify costing methodologies.”

On an ongoing basis, Shanahan continued, “collateral data such as A/R agings, cash receipts, and inventory roll-forwards are received and reviewed weekly to confirm collections, receipts, and asset movement are in line with forecast. Working capital metrics are monitored regularly to ensure that initial valuation assumptions remain accurate.”

Clarke explained that in-person verification is required, even in our remote world: “Even as tools and data streams improve, seasoned practitioners emphasize that there is still no substitute for being in the building when the situation calls for it—particularly with high-risk borrowers, complex inventory, or companies where the numbers simply do not feel right. Physical presence reveals operational realities, cultural cues, and process gaps that no report or dashboard will ever fully capture.”

“Remote capabilities now meaningfully augment that work. Secure data rooms, digital walkthroughs, and video test counts allow exam teams to work faster and more flexibly without giving up control, as long as they remain clear about when each method makes sense. Efficiency matters, but not at the expense of exam integrity; ultimately, the examiner’s role is to protect the lender, and that requires discipline in how, where, and through what channels the work is delivered.”                                                                              

Balancing Speed and Diligence in Underwriting

ABL is often praised for its speed and flexibility, but experienced lenders know that discipline cannot be sacrificed for expediency.

Palmer is unequivocal: “Every deal, whether it’s a $500,000 line or a $15 million facility, goes through the same rigorous process. We never scale down diligence based on loan size. Each transaction includes independent appraisals, field exams, and engagement with experienced legal counsel to ensure structure, documentation, and collateral verification are consistent and airtight. Speed for us doesn’t come from cutting corners; it comes from disciplined execution.”

Hernandez agrees: “Sticking with credit policies and procedures is important and often when corners are cut and if there is a problem later on, it is easy to point fingers and recognize that these procedures weren’t adhered to or that the prospect was pressuring for a quick close (also a possible red flag). It is truly a judgment call on whether or not any due diligence items should or could be circumvented in order to close quickly.”

Breuer adds, “Our underwriting is only as fast as the responsiveness of our prospect and only as good as the quality of information received. We delve into the information and ask many questions to be sure we fully understand the operations and business flow. To us, speed is less important than flexibility in structure and completing the appropriate level of due diligence.”

Loan Documentation and Securitization Facilities
David Morse of Otterbourg offered the legal perspective: “In terms of loan documentation, it has been common for years for a borrower in a large corporate or sponsor credit facility to ask for the flexibility to enter into a ‘securitization facility’ or some other form of ‘receivables purchase financing’. While it may not be uncommon in a leveraged finance term loan to allow debt with a pari passu priority as to assets of a common borrower, that obviously is fundamentally inconsistent with the structure of an asset-based facility (which interestingly doesn’t always stop companies from asking). That said, in the larger transactions, there may be a basket for such a facility, but both in terms of the documentation and the practical realities of monitoring and tracking, it really needs some work.”

Morse went on to explain: “The best way for it to work is to have the receivables arising from a separate business owned by a separate subsidiary or a separate pool of receivables, like Medicare or Medicaid receivables. But the practical issues go to such basics as to where the customers on the ‘sold’ receivables are making payments and that those payments are clearly made to separate deposit accounts and not commingled with the receivables that are the basis for the asset-based loan. Common customers are a problem. And obviously absolutely critical is the lender’s confidence in the reporting and tracking of receivables by the company to keep the two pools of receivables separate and for the lender to be able to verify and ‘foot’ to those separate pools.”

Morse also noted that there have been similar types of arrangements used for years in the middle market and lower middle market with factors.  Morse said: “In the middle market and lower middle market, historically it has not been uncommon for an asset-based borrower to factor certain receivables and for the asset-based lender to enter into an ‘assignment of factoring proceeds’ as a tri-party agreement among the asset-based lender, the factor and the borrower/client.”  The key here is that there is an agreement among the parties and the factor is typically notifying the customers to pay directly to it.  And with the careful monitoring of most traditional factors, there is less risk to both asset-based lender and factor of overlapping collateral.” 

Palmer’s philosophy: “Our innovation lies in consistency and control. Every client operates under full cash dominion and control, regardless of size, tenure, or relationship history. We don’t tier monitoring standards or lighten our structure based on perceived risk; the process is the same for all. Our diligence is intentionally exhaustive, and our loan documents are comprehensive — nearly the size of an old phone book, as we like to say.”

Breuer points to technological advances: “We use technology to assist in pre-funding verifications for our recourse factoring product as well as ongoing verifications and collections for our nonrecourse factoring product. We use a proprietary system along with inventory appraisals to efficiently monitor the inventory at the SKU level.”

The Future

Secured finance is evolving, with technology empowering, not replacing, human judgment. Palmer observes, “Real-time data access, automation, and analytics are creating major efficiencies, but the real value comes when those tools free analysts and account executives to think more critically and use judgment. Technology should enhance decision-making, not eliminate it.”

Hybrid facilities that blend ABL with cash flow or recurring revenue components are becoming more common, but Palmer warns, “without proper guardrails, those structures can quickly lead to problems down the road.”

The enduring relevance of asset-based lending is rooted in its discipline. As Palmer concludes, “Every cycle proves that disciplined lenders endure while undisciplined ones rise fast and fail faster. When lenders chase volume or loosen controls, it doesn’t just hurt their balance sheet — it risks damaging confidence in the entire industry.”

Proper ABL controls protect all stakeholders—lenders, investors, and borrowers—by ensuring transparency, accountability, and early detection of risk. In a market where speed and yield often dominate the conversation, control is what ensures longevity. As Palmer advises, “Strong underwriting, control, and discipline protect shareholders and borrowers alike. That’s what ensures our industry remains both secure and indispensable.”

Chatgpt assisted in the creation of this article.