Asset-Based Lending for Manufacturers: How Raw Materials, WIP, Finished Goods, and Equipment Fund Working Capital

No borrower presents a harder inventory story to an asset-based lender than a manufacturer. A distributor buys finished goods and sells them — its inventory is one pool, valued one way. A manufacturer turns raw materials into work-in-process and then into finished goods, and those three stages are not the same collateral. They are valued differently, advanced against at different rates, and one of them — work-in-process — usually carries little or no borrowing-base value at all. A manufacturer that does not understand why will be surprised when its availability comes in well below the book value of the inventory sitting on its floor.

Over four decades in asset-based lending — as a lender, as founder of ABLC, and as the author of Asset Based Lending Disciplines — I have structured and placed facilities for manufacturers across many industries, and the conversation always starts in the same place: what the company can actually borrow against, stage by stage. This is the borrower-facing guide to how an ABL lender reads a manufacturer's collateral, why work-in-process is treated the way it is, how receivables and equipment round out the facility, and how a manufacturer prepares to borrow against what it truly owns.

Why Manufacturing Is the Hardest Inventory Story in ABL

Asset-based lending advances against eligible accounts receivable and eligible inventory. For most borrowers, inventory is a single category. For a manufacturer, the balance sheet line called "inventory" is really three different things at three different stages of conversion, and an ABL lender underwrites each separately because each has a different value in a liquidation — which is what an advance rate ultimately measures.

Inventory stage	What it is	How a lender views it
Raw materials	Purchased inputs not yet worked on	Often saleable to other buyers; can carry real advance value if commodity-like
Work-in-process (WIP)	Partially completed goods on the line	Usually ineligible — not finished, not resaleable, hard to value
Finished goods	Completed, ready to sell	The strongest inventory collateral, advanced on net orderly liquidation value

The takeaway a manufacturer should carry into every lender conversation: the inventory that earns the most availability is finished goods, raw materials may earn some, and the work-in-process between them usually earns little or none. The reason is liquidation value, and it is worth understanding rather than just accepting.

Why Work-in-Process Is Usually Ineligible

Work-in-process is the inventory a lender struggles with most, and the logic is straightforward once you frame it as a liquidation question. Eligibility and advance rates in ABL are anchored to what the collateral would bring if the lender had to sell it without the company operating. A half-finished product fails that test on several counts:

• It is not saleable as-is. A partially machined casting, a sub-assembly missing components, or a batch midway through a process has no ready buyer. It is worth its finished value only if someone completes it — and in a liquidation, no one is running the line.
• It is hard to value reliably. Standing on the floor, WIP is a mix of consumed raw material, applied labor, and allocated overhead. Much of that recorded cost is not recoverable in a sale, so book value badly overstates liquidation value.
• It is specific to the company's process. Raw materials can often be sold back into the market; finished goods can be sold to customers. WIP is frequently configured to one customer's specification and one company's tooling, making it close to unsaleable to anyone else.

This is why most ABL facilities exclude WIP from the borrowing base entirely, or include only a narrow, appraised slice in industries where partially completed goods retain value. It is not a judgment on the manufacturer — it is a judgment on what the inventory would fetch if the company stopped. A manufacturer with a large WIP balance should expect that value to sit outside its availability and plan its liquidity accordingly. For the broader framework on what does and does not qualify, see our guide on inventory eligibility in asset-based lending.

How Raw Materials and Finished Goods Are Advanced

The two inventory categories that do carry value are advanced against on the basis of a net orderly liquidation value (NOLV) appraisal, not on cost or book value. An independent appraiser estimates what the inventory would realize in an orderly sale, and the lender advances a percentage of that figure.

• Finished goods are the strongest inventory collateral because they can be sold to the company's existing customer base or into the market. Advance rates are set against the appraised NOLV, and commodity or broadly-marketable finished goods earn more than highly specialized SKUs with a thin buyer pool.
• Raw materials can carry meaningful value when they are commodity-like and resaleable — steel, resin, lumber, standard components. Specialized or custom raw materials that only fit this manufacturer's product earn far less, because their resale market is narrow.

The practical consequence is that two manufacturers with identical inventory dollars on the balance sheet can have very different availability, depending on how marketable their specific raw materials and finished goods are. Understanding how the appraisal drives the advance rate is the single most useful thing a manufacturer can do before approaching lenders — our guide on how lenders calculate advance rates walks through the mechanics.

Receivables: The Other Half of a Manufacturer's Borrowing Base

Inventory gets the attention, but for most manufacturers the larger and steadier source of availability is accounts receivable. When goods ship and the invoice is issued, the collateral converts from finished-goods inventory into a receivable — typically advanced at a higher rate than inventory because receivables are closer to cash and easier to collect. A manufacturer's borrowing base is the sum of eligible AR and eligible inventory, and the two move as product flows through the cycle.

The receivable side carries its own eligibility tests that matter especially to manufacturers:

• Customer concentration. Manufacturers often sell to a handful of large OEMs or retailers. Heavy reliance on one customer triggers concentration limits that cap how much of that account counts toward the borrowing base.
• Dilution. Returns, warranty credits, rebates, and pricing disputes reduce the realizable value of receivables. Lenders size a dilution reserve to account for it, and manufacturers with meaningful return or rebate activity should expect it.
• Aging and eligibility. Past-due and cross-aged invoices fall out of the base. How a lender reads the AR aging report directly shapes availability.

Equipment: Borrowing Against the Plant Itself

Manufacturers are equipment-heavy, and machinery and equipment can support liquidity beyond the AR-and-inventory revolver. In many manufacturing ABL facilities, an equipment term loan or an equipment component sits alongside the revolver, advanced against the appraised value of the machinery — typically on a forced or orderly liquidation value basis, amortizing over time rather than revolving.

This matters because a manufacturer's value is not only in its working-capital assets. The production line, CNC machines, presses, and material-handling equipment often represent significant collateral that a pure AR-and-inventory revolver ignores. Pulling that equipment value into the facility can add real availability for a capital-intensive manufacturer. Our guide on equipment in ABL facilities explains how machinery advance rates, OLV/FLV appraisals, and reappraisal cycles work.

Seasonality and the Manufacturing Build Cycle

Many manufacturers build ahead of demand — producing finished goods in advance of a peak selling season, or buying raw materials ahead of a price increase or a long lead-time window. That build consumes cash and swells inventory months before the receivables arrive to fund it. A well-structured manufacturing ABL facility anticipates this with a seasonal over-advance or over-line that provides extra availability during the build, then steps back down as finished goods ship and convert to receivables. A manufacturer with a pronounced seasonal cycle should raise this at the term sheet stage rather than discovering a peak-season gap later.

How a Manufacturer Prepares to Borrow

The manufacturers that get the best facilities are the ones that present their collateral the way a lender reads it. A few steps make the difference:

1. Break inventory into its three stages. Report raw materials, work-in-process, and finished goods separately, not as a single inventory number. A lender needs to see the split to size eligibility, and a manufacturer that already reports it this way looks prepared.
2. Know your WIP exposure. Understand how much of your inventory dollars sit in work-in-process and therefore outside the likely borrowing base, so liquidity planning is realistic.
3. Get ahead of the appraisal. Because inventory and equipment availability ride on NOLV and machinery appraisals, understanding how marketable your finished goods, raw materials, and equipment are tells you what to expect.
4. Assemble the collateral package early. AR aging, inventory detail by stage, customer concentration, and an equipment list are the core of the diligence. Our ABL due diligence checklist is the document request list to work from, and first-time borrowers should also prepare for a field exam.

How DCE Helps Manufacturers

We help manufacturers structure their collateral the way the market underwrites it — splitting inventory by stage, setting realistic expectations on work-in-process, sizing the receivable and finished-goods availability, and pulling equipment value into the facility where it adds liquidity. We then package the deal and place it with lenders whose appetite fits the company's industry, customer base, and seasonal pattern. We do not make the credit decision — that is always the lender's — and we do not provide legal, tax, or accounting advice. Our role is to help a manufacturer understand what it can actually borrow against and to present it to the right lenders.

For broader perspective on how the ABL market is structured, ABLC.net publishes commentary from senior practitioners across the industry.

This article is educational and does not constitute legal, tax, accounting, or investment advice. Final credit and funding decisions are always made by the lender.