There are a number of advantages to using asset-based financing:

• Generates more liquidity—for a company within a cyclical industry, borrowing money against its assets may result in a more predictable borrowing availability. On the other hand, if a company borrows against a multiple of earnings (EBITDA) and the earnings decline, the borrower will find itself being able to borrow less.
  
  
• Has built-in disciplines—because the borrowing availability is based on advance rates against current accounts receivable, an ABL structure motivates borrowers to collect their receivables more promptly. Similarly, because work-in-process generally is ineligible collateral, borrowers are motivated to increase the efficiency of their production process to increase liquidity.
  
  
• Fewer financial covenants, including higher balance sheet leverage—typically, an asset-based loan requires fewer financial covenants because of its collateral orientation. The most common covenants are debt service coverage and net worth.
  
  
• Lender patience—because a lender has collateral to protect its loan, the lender may be willing to give the borrower more time to turn around a company that may be having financial difficulties.