Introduction
For many retailers, the most important credit line lends against what is on the shelves rather than against what the business earns. An asset-based loan sets the amount a retailer can borrow by the value of its inventory and receivables, so the line grows when stock builds ahead of the holidays and shrinks as goods sell or lose value. Lenders care less about current profits than about the liquidation value they could recover by selling the inventory if the retailer failed.
Macy's facility shows the structure. In April 2025 the company amended its asset-based credit facility, reducing it from $3.0 billion to $2.1 billion and extending its maturity to April 2030, with a borrowing base equal to 90% of the net orderly liquidation percentage of eligible inventory less customary reserves, according to Macy's Form 8-K. The general mechanics of asset-based lending are covered in the Industrials guide's asset-based lending and debt structuring in industrial LBOs; this article covers how they apply to retailers.
How a Retail Borrowing Base Works
- Borrowing Base
The amount a borrower may draw under an asset-based loan, calculated from the value of eligible collateral, such as inventory and receivables, multiplied by advance rates and reduced by reserves the lender sets. Availability is the lower of the borrowing base and the facility size, less amounts already drawn and letters of credit.
The core of a retail borrowing base is inventory, valued not at cost but at what it would fetch in an orderly liquidation.
- Net Orderly Liquidation Value (NOLV)
The amount a lender could expect to recover by selling a borrower's inventory through an orderly going-out-of-business sale, net of the costs of running the sale, usually expressed as a percentage of the inventory's cost. Independent appraisers estimate it by category and season.
Lenders then apply an advance rate to the NOLV and subtract reserves for claims that would rank ahead of them or reduce recoveries, such as rent owed to landlords, customer deposits and gift card balances.
| Component | Typical treatment |
|---|---|
| Inventory | Advance rate applied to the appraised NOLV, after excluding ineligible stock |
| Credit card receivables | High advance rate, since card processors pay within days |
| Pharmacy and other receivables | Included at lower rates where eligible |
| Reserves | Deducted for rent, taxes, gift cards, customer deposits and other priority claims |
| Letters of credit | Reduce availability once issued |
How inventory turns and working capital drive the size of that inventory is covered in inventory turns, GMROI and retail working capital.
Appraisals, Seasonality and Availability
Appraisals set the value
Lenders commission inventory appraisals at least annually, more often when availability falls, and the result can move a retailer's availability by tens of millions of dollars. Recovery rates depend on the merchandise: everyday goods and hardlines tend to hold their value in a liquidation, while fashion apparel, seasonal goods and electronics lose value quickly. Aged or slow-moving stock is often excluded from eligible inventory altogether, as are goods in transit that the retailer does not yet control and consigned merchandise it does not own.
Appraisers also look at the retailer's inventory mix and its recent markdown history. A chain carrying more seasonal or fashion goods than usual, or clearing stock at deeper discounts, will see its recovery rate cut at the next appraisal, which reduces availability even if the dollar value of inventory is unchanged.
Seasonal peaks
Retailers build inventory ahead of the holiday season and draw on their asset-based lines to pay for it, then repay as the stock sells. Because the borrowing base rises with inventory, the line usually accommodates the seasonal peak, and some facilities allow seasonal advance rates, slightly higher advance rates during the months when inventory is built for the holidays. Lenders still watch whether the inventory being bought is the kind that will sell. A retailer that builds stock ahead of a weak season ends up with high borrowings and inventory that must be cleared at a discount, which then lowers the appraised value.
Excess availability
The most watched number is excess availability, the amount the retailer could still borrow. Macy's, for example, must maintain a fixed charge coverage ratio of at least 1.00 to 1.00 at the end of a fiscal quarter if availability falls below the greater of 10% of the loan cap and $175 million, according to the same 8-K. While availability stays above such thresholds, the retailer faces few financial covenants; once it falls below them, the springing covenant comes into force and lenders gain more control. How fixed-charge coverage is measured for store-based businesses is explained in lease-adjusted leverage and fixed-charge coverage.
FILO Tranches
- First-In, Last-Out (FILO) Tranche
A term loan or revolving tranche added to an asset-based facility that lends against the same collateral at a higher advance rate. It is funded first and repaid last from collateral proceeds, so it takes more risk than the main revolver and carries a higher interest rate.
A FILO tranche stretches the same collateral further by lending at a higher advance rate, often from liquidation specialists that know how to value and sell retail inventory. Retailers use one to add liquidity without changing their main revolver, often when availability is tight. Big Lots added a first-in, last-out term loan of up to $200 million from an affiliate of Gordon Brothers Capital in April 2024, incremental to its $900 million asset-based revolver, saying the facility significantly enhanced its liquidity, according to Big Lots' announcement. Within months the company entered Chapter 11, and in January 2025 Gordon Brothers completed its purchase of Big Lots' assets and facilitated a sale of at least 200 stores to Variety Wholesalers, according to Gordon Brothers.
Pricing and intercreditor terms
Because FILO lenders are repaid only after the main revolver, they charge a significantly higher rate and negotiate their position carefully in an intercreditor agreement. Larger retailers may also have term loans or bonds secured on different assets, a split-collateral structure in which the asset-based lenders hold first claim on inventory and receivables while term lenders hold first claim on real estate, intellectual property and other fixed assets. The order of claims on each pool of collateral decides who is protected when a retailer fails, the process described in distressed retail: liquidations and brand IP sales.
Covenants and What Lenders Watch
Asset-based facilities are light on maintenance covenants but heavy on monitoring. Retailers deliver borrowing base certificates regularly, weekly when availability is low, and lenders can impose cash dominion, sweeping the retailer's daily collections to repay the loan, once availability falls below set levels. Springing covenants such as Macy's fixed charge coverage test come into force at the same point.
ABL versus cash-flow debt
Not every retailer relies on an asset-based line. Investment-grade chains with strong earnings often borrow unsecured, through bonds and cash-flow revolvers, and keep their inventory unencumbered. Asset-based lending suits retailers with volatile earnings but valuable, liquid inventory, because it prices off the collateral rather than the credit rating, and it often remains available when cash-flow lenders would not lend at all. In leveraged buyouts, an asset-based revolver commonly sits alongside a term loan, a combination discussed in consumer LBOs: which brands and retailers fit.
Asset-based lending sits alongside the other fixed obligations in a retailer's capital structure. Rent, in particular, competes for the same cash flow as debt service. When a retailer fails, the same liquidation value that set the borrowing base determines what lenders recover. For a coverage banker, the asset-based line is often a retailer's lifeline. Healthy retailers barely notice it; struggling ones live by its availability, and the terms negotiated in good times decide how much room they have when sales turn.
