The credit agreement governing your ABL financing for distributors — the advance rates, the eligibility definitions, the reserve stack — was negotiated once, at origination. It does not update unless you ask. For a distributor who set a facility in 2023 or 2024, the inputs have moved materially. The facility almost certainly has not caught up.
Key Takeaways:
- ABL financing for distributors is governed by a formula set at origination — eligible AR and inventory at NOLV, minus reserves, equals the actual drawable amount. That formula does not update unless you ask.
- Freight-driven inventory cost inflation in 2026 is creating the same NOLV-vs.-book gap that tariff front-loading created in 2024–2025. Higher carrying cost does not mean higher borrowing base availability.
- Slow-moving inventory is almost certainly creating ineligible reserves that quietly reduce available capacity. The longer the turns, the larger the subtraction from your eligible pool.
- What NOLV represents relative to carrying cost varies sharply by what you distribute — commodity parts carry very different liquidation value than technology hardware or perishables.
- At $10MM+ EBITDA, a cash-flow structure removes the borrowing base constraint entirely and can deliver significantly more capital.
Why Did the Borrowing Base Drift After 2022?
The instinct is straightforward: higher inventory book value should mean a higher borrowing base. The reality runs the other way.
Through 2024 and 2025, tariff-driven front-loading raised landed costs across the distributor base. That anxiety has partly resolved — but in 2026, the pressure source shifted rather than disappeared. Global freight costs surged on persistent geopolitical uncertainty, and distributors front-loaded again. According to the Logistics Managers’ Index, the inventory cost sub-index reached 84.1 in May 2026 — the highest reading since May 2022 — with a 29.2-point gap vs. the inventory levels index, the largest divergence ever recorded.
Lenders advance on the lower of cost or NOLV — realizable liquidation value — not against freight-inflated carrying costs. For finished goods with a real secondary market, NOLV tracks landed cost reasonably well. For technology hardware, rapid-obsolescence items, or products distorted by front-loading, NOLV diverges from book. The distinction matters: accounting book value reflects what you paid to acquire and hold inventory, while NOLV reflects what a lender can recover in a liquidation — and freight-inflated carrying costs widen that gap without improving collateral value.
The compounding effect: slow-moving inventory crosses aging thresholds and goes fully ineligible. Inventory carrying costs run 20–30% of inventory value per year. A distributor carrying excess slow-moving stock pays twice — the operational drag and the capacity subtraction from the borrowing base.
The advance rate on eligible inventory is consistently 85% of NOLV across sub-sectors. What varies is what NOLV represents relative to your carrying cost — a function of secondary market depth, obsolescence risk, and turn speed. An industrial parts distributor with deep secondary markets is in a fundamentally different position than a technology hardware distributor on a six-month obsolescence clock.
The bank is not making a mistake. The borrowing base is working as designed. The question is whether the design still reflects today’s picture.
What Is the Lender Market for ABL Financing for Distributors Doing Right Now?
Distribution is a lender-favored credit category. Non-bank ABL outstandings were up 12.6% in Q4 2025; syndicated ABL volume hit $147.3B for the year — third highest on record — per SFNet’s 2025 Year-End Survey. ABF Journal describes ABL as “no longer a product of last resort — it is a first-choice capital solution,” with a wave of new fund-backed lenders entering alongside traditional banks. PE-backed distribution platforms have already begun refreshing 2022–2024 vintage facilities against current terms. The owner-operated distributor with a facility from the same period has generally not run that exercise.
How Should a Distributor Respond to a Stale ABL Facility?
The structural issues above do not resolve inside an incumbent relationship. A lender has no incentive to revisit terms that benefit them. The ABL market in 2026 is as competitive as it has been in years — and that competition produces real outcomes for borrowers who run a process.
- Shop competing ABL lenders for better pricing and terms. Banks are pursuing quality distribution credits at sub-SOFR+2.0%, often with no upfront fees. Non-bank ABL specialists run approximately SOFR+3.5–4.0% — meaningfully below historical norms — and are often more accommodative on structure at only a marginal cost premium. On a $40MM facility, 150–200 basis points of spread improvement is $600,000 to $800,000 per year. Beyond pricing, competing lenders are negotiating eligibility criteria on a case-by-case basis — showing flexibility on how slow-moving inventory built ahead of tariff and freight disruptions is classified, rather than treating it as permanent impairment.
- Right-size the facility commitment. If the business has grown since origination, the incumbent facility is undersized. A competing lender sizes the commitment against today’s collateral — more AR, more eligible inventory — not the prior snapshot.
- Evaluate whether ABL is still the right structure. At $10MM+ EBITDA, a cash-flow facility removes the borrowing base constraint entirely. Capacity is sized against EBITDA — banks at 3–4x, middle-market direct lenders at 4–5.5x for larger transactions — with no weekly borrowing base certificate. A distributor running $12MM of EBITDA against a $20MM ABL facility could access $40MM+ under a cash-flow structure. That conversation starts with knowing which structure fits today’s business, not the one at origination.
The incumbent relationship carries real value. A competitive process does not require switching lenders. For distributors evaluating ABL financing, it requires knowing what the market would offer — and using that to have a different conversation.
