Asset-based facilities are not always a single revolver. In most middle-market deals, the working-capital revolver against accounts receivable and inventory is paired with a separate term loan secured by machinery and equipment. The structure can also include a real estate term loan, an IP carve-out, or a FILO tranche sitting on top of the revolver. Borrowers who treat the facility as a single number — total commitments — miss the structural choices that determine cost, availability, and recovery on a refinance.
The question is not whether equipment "fits" in an ABL facility. It is which collateral belongs in the daily-moving borrowing base and which belongs in a fixed-amortization term loan. Get this wrong and the borrower either over-pays for working-capital availability that does not exist, or leaves long-lived collateral stranded in a revolver that re-tests it constantly.
At Don Clarke Enterprises, we advise borrowers on facility structure before signing — including how to split collateral across tranches, how to size the M&E term loan, and what amortization the cash flow can actually carry. Donald Clarke — SFNet Hall of Fame inductee (2021), Lifetime Achievement Award recipient, author of Asset Based Lending Disciplines (the first ABL textbook), and the trainer behind 5,000+ ABL professionals at GE Capital, JP Morgan Chase, Lloyds, and Barclays — built his career on getting collateral allocation right between revolving and term tranches.
Why Equipment Usually Does Not Belong in the Borrowing Base
The ABL borrowing base is a daily-recalculated number that fluctuates as receivables turn and inventory moves. Lenders are comfortable advancing 80-90% against eligible receivables and a NOLV-based percentage against eligible inventory because both asset classes liquidate predictably within a defined window — typically 90 days for receivables and the NOLV horizon for inventory.
Machinery and equipment behave differently. M&E is long-lived, illiquid, and recovers value over a longer disposition timeline. Pinsent Masons' practical summary of ABL structure notes that "asset-based borrowing can be structured as a revolving line of credit, a term loan or a combination," with the term loan typically secured by machinery and equipment and the revolver against AR and inventory (Speritas Capital). The split exists for three reasons.
- Liquidation horizon. Receivables and inventory liquidate in 90 days or less in most cases. Equipment liquidation runs 6-18 months and depends heavily on the asset class — general-purpose machine tools liquidate faster than specialized line equipment.
- Daily volatility. AR and inventory values change every day as the business operates. Equipment values change slowly — usually with the annual appraisal, occasionally with a market event.
- Advance rate stability. A term loan locks in a single advance rate against a single appraised value. A revolver re-tests advance rates against constantly changing collateral. Equipment does not need the daily test.
The structural payoff is that the borrower gets long-dated, scheduled capital from the equipment, and short-dated, fluctuating capital from working capital — each priced and amortized appropriately.
How the M&E Term Loan Is Sized
The starting point is the orderly liquidation value (OLV) of the eligible equipment, set by an independent appraiser. Three appraisal values matter:
- Forced Liquidation Value (FLV): what the equipment would bring in a 60-90 day auction. The most conservative number. Used by some lenders as the lending base.
- Orderly Liquidation Value (OLV): what the equipment would bring in a 6-12 month orderly sale. The most common base for an M&E term loan.
- Fair Market Value in Continued Use (FMV-CU): what the equipment is worth as part of an operating business. Generally not used for ABL — it overstates recovery in a liquidation.
Most middle-market ABL term loans advance 75-85% of OLV. Some lenders go to 90% on certain asset classes (rolling stock, standard machine tools, transportation assets). Specialty assets — single-purpose food and beverage lines, semiconductor fab equipment, fashion-specific tooling — typically get lower advance rates because the resale market is thinner.
The appraisal mechanics matter as much as the percentage. We push borrowers to negotiate three points:
- Appraisal frequency. Annual is the default. Some agreements require more frequent appraisals if availability under the revolver tightens — a trigger that should be tied to objective metrics, not lender judgment.
- Appraiser selection. Lenders maintain panels. Borrowers should have the right to propose appraisers from the panel and the right to object once for cause.
- Reset mechanics. If the new appraisal comes in lower, what happens to the outstanding balance? The default is forced amortization of the excess — that should be smoothed over 6-12 months, not demanded in a single payment.
How the Two Tranches Interact
The revolver and the M&E term loan share a credit agreement, cross-default and cross-acceleration provisions, the same financial covenants, and almost always the same lien on all assets. But they amortize and price differently.
Revolver: no scheduled amortization. Interest only on drawn balance. Unused commitment fee on the undrawn portion. Pricing typically SOFR + a margin grid that steps with average availability.
M&E term loan: scheduled amortization, often straight-line over 5-7 years (sometimes longer for real estate). Some agreements use a mortgage-style amortization with a 10-15 year schedule and a 5-year balloon. Pricing is usually 50-150 basis points wider than the revolver because the equipment collateral is less liquid.
The interaction matters most in three scenarios.
Cash Flow Stress
When the business hits a soft quarter, the revolver naturally accordions — receivables fall, the borrowing base falls, and the borrower draws less. The M&E term loan does not flex. Scheduled amortization keeps coming due. Borrowers who size the term loan at the top of OLV with no headroom often hit a covenant problem when revolver availability tightens and term loan amortization stays fixed.
Asset Disposition
If the borrower sells a piece of equipment, the proceeds typically have to pay down the term loan first (often at a 1:1 ratio to the appraised value of the asset sold). The credit agreement should distinguish ordinary-course dispositions (which can be reinvested) from large dispositions (which trigger mandatory prepayment). The threshold matters — a $250K threshold catches every forklift sale; a $1M threshold preserves operational flexibility.
Excess Cash Flow Sweeps
Many middle-market term loans include an excess cash flow sweep — a mandatory annual prepayment equal to a percentage (often 25-50%) of excess cash flow above a defined threshold, applied to the term loan. The sweep can be reduced or eliminated based on leverage tests. Borrowers should negotiate (1) a leverage step-down (sweep falls to 25% or 0% if leverage is below a target), and (2) reinvestment rights for cash flow used to fund capex or permitted acquisitions.
When the Equipment Belongs on the Borrowing Base Instead
Some lenders include an "M&E sub-line" inside the revolver — a fixed-dollar advance against M&E appraised value that decreases on a schedule but lives inside the same borrowing base mechanic. This structure exists for two reasons.
First, smaller deals (sub-$25M total facility) sometimes cannot economically support two separate tranches. The single borrowing base simplifies documentation and reduces legal cost.
Second, certain asset-heavy borrowers — equipment rental, transportation, certain manufacturing — have enough M&E to support a sub-line but not enough working capital to justify a stand-alone term loan. The sub-line gives them long-dated availability without the complexity of two tranches.
The downside is that an M&E sub-line typically amortizes faster than a stand-alone term loan (often 7-year straight-line baked into the availability formula), and the M&E availability declines monotonically. A stand-alone term loan with reset rights against a fresh appraisal can hold more value over time as the borrower replaces equipment.
Where the M&E Term Loan Connects to the Rest of the Capital Stack
The equipment term loan does not exist in isolation. Three connections matter.
Captive Equipment Finance
Many equipment manufacturers offer captive financing — a separate term loan or lease structured directly with the equipment seller. Captive financing often has lower rates than ABL term loans (manufacturers subsidize financing to move equipment). The trade-off is that the captive lender takes a first-priority lien on the financed equipment, which means it is not available to the ABL term loan. We help borrowers think through which assets should sit in captive financing and which belong in the ABL.
Sale-Leaseback Transactions
For borrowers with significant unencumbered equipment, a sale-leaseback can unlock capital that would not be available on an ABL term loan basis — often at a higher implied advance rate. The trade-off is that the equipment now sits outside the borrower's balance sheet and is subject to the lease terms. Sale-leaseback is usually most attractive for real estate; for equipment, it is a structural choice that depends on the company's tax position and the equipment's remaining useful life.
Subordinated Debt and Mezzanine
If the M&E term loan and revolver together do not produce enough capital for the business plan, subordinated debt or mezzanine can sit behind the senior package. We covered the layering in our guide to subordinated debt behind an ABL revolver.
Six Negotiation Points for the M&E Tranche
Most borrowers focus on the revolver and let the term loan terms get drafted in the boilerplate. That is a mistake. These are the six points we focus on for the M&E term loan.
1. Amortization Schedule
Straight-line over the useful life is the borrower-friendly answer. Lenders sometimes push for faster amortization (3-5 years). Match the amortization to the equipment's depreciation schedule, not to an arbitrary lender target.
2. Mandatory Prepayment Triggers
The ABL agreement will list mandatory prepayments — asset sales, insurance proceeds, condemnation, excess cash flow. Each trigger should have a reinvestment right if the proceeds are reinvested in the business within a defined window (typically 12 months, sometimes 18-24 for capex-intensive borrowers).
3. Voluntary Prepayment Flexibility
The term loan should be prepayable at any time without premium or breakage costs (after any prepayment penalty period). Some lenders insert a 1% premium in year one — that should be removed or limited.
4. Appraisal Reset Mechanics
If the next appraisal comes in lower, the excess should be cured through additional collateral, a temporary availability block, or smoothed amortization — not a single demand prepayment.
5. Equipment Eligibility and Carve-Outs
Define what equipment is eligible (owned outright, located in the U.S., not subject to other liens). Build a carve-out for low-value items that should not require individual collateral filings — typically equipment under $25K-$50K per unit.
6. Cross-Default vs Cross-Acceleration
Cross-default means a default under the revolver automatically defaults the term loan and vice versa. Cross-acceleration is narrower — the term loan defaults only if the revolver is actually accelerated. Push for cross-acceleration where possible.
For broader ABL community commentary and benchmarking, ABLC.net publishes industry data and practitioner insights from across the lending market.
How DCE Advises on M&E Tranche Structure
We advise borrowers on whether an M&E term loan belongs in the facility, how to size it against appraised collateral, and how to negotiate the amortization, prepayment, and cross-default mechanics. We do not appraise equipment, we do not underwrite, and we do not negotiate the term sheet on the borrower's behalf — that is the borrower's role with counsel. We help borrowers prepare the equipment schedule, select appraisers from lender panels, and understand how the term loan economics interact with the revolver before signing.
Final credit and funding decisions are always made by the lender. Our role is to make sure the borrower walks into the negotiation knowing which tranche should carry which collateral, what the amortization can actually support, and where the lender will move.
Structuring a new facility with equipment collateral?
If you are sizing a new ABL facility or refinancing an existing one and equipment is a material part of the collateral pool, the term loan structure deserves its own diligence. Submit your deal and we will advise on tranche sizing, appraisal mechanics, and amortization before the term sheet is signed.
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