Managing Collateral Transitions in ABL Payoffs

Exiting a bank facility to an asset-based lender (ABL) can be more complicated than it looks on paper. Probably the biggest challenge is how the collateral has been managed in the lead-up to the transition. When collateral hasn’t been monitored consistently, or when lending decisions have leaned too heavily on inventory relative to accounts receivable, payoff proceeds may fall short of the outstanding balance. That’s where complications arise for the bank to exit cleanly.

Banks are a common first stop for business financing, but they can also be one of the biggest roadblocks when it comes to scaling. Understanding why traditional lenders hesitate (and knowing the alternatives) can help business owners take advantage of growth opportunities without unnecessary delays.

Why Collateral Oversight Matters in Payoffs

Collateral is the foundation of any ABL facility. During a payoff, even small gaps in oversight can create outsized problems:

• Accounts receivable may age out faster than expected, reducing borrowing base availability.
• Inventory values may shift due to obsolescence, seasonal swings, or market conditions.
• Aggressive lending practices can leave little margin to absorb shortfalls.

If a bank has been lacking in oversight, a payoff that should be routine can turn into a drawn-out negotiation or worse; the bank may not be able to exit the deal at all.

Practical Strategies for Banks During Transition

Looking at a client exit from an ABL perspective, there are proven ways for banks to protect themselves and help ensure a smooth exit:

• Work the balance down ahead of transition. Proactive paydowns reduce exposure and narrow the gap between collateral value and loan balance.
• Be willing to consider a charge-off. While not ideal, absorbing a manageable loss can sometimes resolve the payoff more efficiently than prolonging the process.
• Hold back part of the deal. If the ABL can’t come up with enough available funds to take the bank out in full, the bank can consider terming out a piece while being in second position on the collateral.

Strong Collateral Management Protects the Exit

From the bank’s perspective, the cleanest payoffs come from disciplined collateral monitoring and balanced lending between receivables and inventory. Strong oversight reduces the chance of residual exposure, accelerates the exit process, and helps the bank transition out without costly surprises.

In today’s competitive lending environment, well-managed collateral isn’t just a safeguard. It’s the key to ensuring banks exit deals quickly, with minimal disruption, and come out whole.

About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power, and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset-based financing solutions from $500,000 to $8 million with no financial covenants.

As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.

If you know of, or are, a business in need of non-traditional financing, contact Mark Hafner at 800.742.0733 or mhafner@celticcapital.com, or visit us at celticcapital.com.