Fatos Selita, Barrister of England and Wales, Attorney of the State of New York
Fatos Selita, Barrister of England and Wales, Attorney of the State of New York

Cross-border asset-based lending (ABL) is becoming a common form of financing for small- and medium-sized enterprises (SME) across the globe. This will facilitate a world-wide web of interdependent connections between SMEs, which will strengthen good relations between nations, regardless of cultural, political, religious or other differences. Cross-border ABL has the potential to create warm business relationships between citizens of different countries that can overcome political, religious or racial issues and make the world a better, safer place to live.

How ABL Operates

ABL involves lending on security over assets, such as present and future accounts receivables, inventory and equipment and machinery (E&M). ABL provides SMEs with the opportunity to obtain financing on security over movable assets that would otherwise be “dead capital.” This includes payments due from customers or any assets not in possession of the borrower. ABL allows for flexible borrowing, as and when required, subject to the borrowing base limit. The latter is determined by the value of qualifying A/R (payments due which are less than 90 days old), inventory and E&M. The borrowing base is usually 80% of the amount of qualifying A/R, plus the market value of the inventory and E&M (less depreciation in value). Therefore, the borrowing base varies in accordance with the amount of A/R and the value of the inventory and E&M at that particular time. This means an increase of A/R and inventory allows for the businesses to increase the borrowing. In the same way, payments from customers allow for the borrower to reduce the borrowing.

Through ABL, businesses can also obtain financing through downstream, sidestream and upstream guaranties. These guaranties can, through workarounds, be effectively used in many countries. Through workarounds of ABL, companies can also secure the financing of purchases from other companies. Overall, ABL provides numerous financing options, including to businesses that do not satisfy the real property and financial statement borrowing criteria. It therefore allows SMEs to obtain financing to survive and grow.

All About Workarounds

When structuring a cross-border ABL deal, you will often need an attorney’s opinion, which will not always be all inclusive. From my experience participating in the work of UNCITRAL (United National Commission on International Trade Law) on its Legislative Guide on Secured Transactions, and training with Richard Kohn and William Starshak of Goldberg Kohn, Chicago, I learned a few useful tips regarding structure of cross-border deals:

  • If a local attorney confirms that the deal can be structured to match your client’s needs, don’t take “yes” for an answer. Check and double check. For a number of reasons, including differences in legal terms and the tendency to avoid turning away a new deal, the attorney’s opinion might be wrong. Consequences, however, can be serious, including enforcement of security.
  • If a local attorney confirms that the deal cannot be structured to match your client’s needs, don’t take “no” for an answer. Again, the attorney may be wrong for a number of reasons, including failing to think of a workaround when legislation does not allow for structuring the deal in question. As a result, you might lose the opportunity.
  • Very few countries have modernized ABL laws. The concept is not even recognized in many countries. Therefore, it is not always possible to structure ABL deals effectively by simply following the legislation. This is where finding workarounds becomes crucial. In a recent example, a U.S. lender was lending to a U.S. borrower that was acquiring businesses in several countries, including Australia and the Netherlands. The Netherlands’ legislation did not allow for companies to secure the purchase of their shares, and the U.S. company had no way of raising the financing unless it was to be secured by the target companies’ assets. The solution was to use the Dutch assets to secure the purchase of the Australian target.

ABL and SMEs

In ABL-friendly jurisdictions, ABL is the main form of lending used by SMEs to obtain financing because SMEs cannot generally satisfy the real property and financial statement financing criteria. ABL provides the option of obtaining financing on security over “dead capital.” Where ABL is not supported by secured transactions laws, most SMEs struggle due to lack of access to financing, making ABL essential for the development of SMEs. For instance, in China, where ABL is not supported, 71% of SMEs surveyed reported a lack of access to financing as the biggest constraint to development.1 In the UK, where secured transactions laws have a few drawbacks, more than 40% of the Federation of Small Businesses member applicants were refused financing in each quarter of 2015. Following changes in secured transactions laws in China, 88% of surveyed SMEs reported that business growth resulted from obtaining accounts receivables financing — further evidence that ABL is key to SMEs’ development.2

The Global ABL Industry

The number of ABL-friendly countries is continuously increasing. Security can now be taken, perfected and enforced over assets in many countries throughout Europe and in Australia, Brazil, Canada and the U.S. In China, where, until recently, it was not possible to create a security interest over revolving and future assets and where there was no registry for security interests on receivables, ABL is becoming just as credible as financial statement lending.

In the UK, where secured transactions laws allow for ABL, around 42,000 businesses use ABL.3 Despite this growth, only a small proportion of UK SME borrowings is obtained through ABL financing.4 This can be attributed to secured transaction law drawbacks, including issues with registration and bans on invoice assignment clauses in contracts. British laws allow invoice assignment (A/R financing) to be contractually barred, unless expensive workarounds are used. Invoice assignment bans are often imposed by large companies on smaller suppliers. Such bans have been addressed in a number of jurisdictions and international law instruments, including the 1988 UNIDROIT Convention on International Factoring, the 2001 UN Convention on the Assignment of Receivables in International Trade and in the UNCITRAL draft Model Law on Secured Transactions. Recently, the UK also has sought to address these bans statutorily and has passed the Small Business, Enterprise and Employment Act 2015 (2015 Act) which empowers the government to scrape restrictions on invoice/receivables financing.5 Under this act, the UK government was able to nullify contractual barring of invoice/receivables financing in business to business transactions.6 The ban on antiinvoice finance terms in business-to-business contracts will come into force in 2016.7

Overall, the ABL industry is likely to become a common form of cross-border lending for SMEs across the globe. An increasing number of countries are modernizing their secured transactions laws. For example, supported by the Commercial Finance Association, UNCITRAL has produced a draft Model Law on Secured Transactions.8

Making the World a Better Place to Live

As cross-border ABL enables the survival and development of SMEs across the globe, it promotes middle class growth and wealth. It supports employment and creates a cross-border network of cooperation between SMEs and between SMEs and financial institutions. This is illustrated by the fact that ABL allows for financing of SMEs on security over assets located in many countries. Through workarounds, ABL also allows for obtaining financing on security over the target company’s assets internationally. Because there are more SMEs than large corporations, the network of direct international business connections created by ABL involves a larger proportion of the world population. This large network of interdependent relationships among SMEs across the globe can
potentially promote good relationships between nations.

Though in early stages of development, ABL has already created a network of cross-border relationships in countries with developed ABL laws. I recently worked on a deal that involved lending on security located in 16 countries. Hundreds of similar deals are concluded each year.

In the near future, the network map of cross-border interdependent relationships may look similar to the world flight network, but with a greater number of international connections. In addition to facilitating economic growth, this web of connections has the potential to promote good relations between nations, reduce the influence of ill-intended media, and make it harder for political, racial, religious or border issues to ignite and sustain conflicts. It therefore follows that the likely growth of ABL will make the world a better and safer place to live.


  1. Secured Transactions Advisory Project. International Finance Corporation, World Bank Group. (IFC).
  2. Secured Transactions Advisory Project. IFC.
  3. See Asset Based Finance Association (ABFA) figures
  4. See the BIS report, Nullification of Ban on Invoice Assignment: summary of responses at gov.uk.
  5. See Clause 1 of the 2015 Act
  6. See Government Response to “Nullification of Ban on Invoice Assignment Clauses”
  7. See Report from BIS and The Rt Hon Anna Soubry MP