What does it cost to get out of an ABL facility early?

Why asset-based lenders charge you to leave

An asset-based lender spends heavily before it earns anything. It pays for a field exam, an inventory appraisal, legal documentation, lien searches, the setup of the borrowing base and the lockbox, and a credit process that is far more detailed than a bank's annual line review. It recovers that investment only by keeping the facility for most of its term.

Non-bank lenders feel this most. Their capital costs more than bank deposits, and they often take on borrowers at a difficult moment: after a loss, a covenant breach, or a bank that cut or froze the line. Many of those borrowers plan to return to a bank as soon as results recover. The lender knows it. The termination fee is how it gets paid for carrying the risk through the hard stretch and then losing the account once the risk has passed. Bank versus non-bank ABL covers the wider trade-off.

The better your recovery goes, the sooner you will want to leave, and the more the exit terms will matter.

How the fee is calculated

The standard formula applies a stated percentage to the maximum commitment, the total the lender agreed to make available, with the percentage stepping down on each anniversary of closing. The balance you owe does not enter into it. A business with a 10,000 commitment and 3,000 drawn pays on 10,000.

That is why the fee can feel out of proportion at payoff. The table below uses an illustrative schedule on a 10,000 commitment and shows the same charge expressed against a 3,000 average balance, which is how it lands on the business.

Several variations show up in agreements, and each changes the bill:

• Commitment at termination versus at closing. If you reduced the commitment earlier, a fee calculated on the closing commitment charges you for room you already gave back.
• Partial reductions. Cutting the commitment without terminating often triggers a proportional fee on the amount cut, which can make it expensive to shed an unused line fee.
• Term tranches. A machinery and equipment term loan or a real estate piece inside the facility may carry its own prepayment premium, separate from the revolver's fee.
• Minimum interest through the term. Some agreements add, or substitute, a charge for the interest the lender would have earned on a minimum balance. Treat it as part of the exit cost.
• Yield maintenance or make-whole. Rare on revolvers, more common on term loans. The difference is covered in yield maintenance versus step-down prepayment.

Watch one more trigger: many agreements make the fee payable on acceleration, so if the lender calls the loan after a default, the fee is added to what you owe. Lenders resist removing that language. It is still worth knowing it is there.

What else you pay on the way out

The termination fee is the largest exit cost, not the only one. A payoff also settles everything the facility has accumulated, and some of it needs planning weeks before the refinancing closes.

The mechanics run through the payoff letter, which states the exact amount to the day and lists the releases the old lender will deliver: UCC-3 terminations, termination of each deposit account control agreement, and releases of any trademark or real estate liens. What a payoff letter should contain and getting a paid-off lender to file its UCC-3 cover the steps.

The carve-outs worth negotiating

Standard fee language applies to any termination for any reason. The negotiation is about exceptions, and the time to win them is at the term sheet. At payoff you have no leverage: the lender is being replaced and will collect what the agreement says.

• Refinancing with the same lender or its affiliates. If the lender, or a bank in its group, provides the replacement facility, there should be no fee. This one is usually granted.
• Sale of the business. A sale pays off the facility at closing, and the fee comes straight out of the owner's proceeds. Lenders resist a full waiver, because a sale is exactly the early repayment the fee is priced for. A reduced fee on a change of control, or a waiver if the lender is offered the chance to finance the buyer and declines, are more realistic asks. See change of control.
• A bank refinancing after a set period. If the plan is to graduate to a bank line, ask for the fee to fall away or fall sharply when a bank refinances the facility after a stated date.
• The lender's own actions. If the lender lowers advance rates, adds discretionary reserves beyond an agreed level or reprices the line, ask for the right to leave without the fee. Not every lender agrees, but it is a fair request: the lender changed the deal, not you.
• An annual right to trim the commitment. A free reduction once a year lets you cut an unused line fee as the business outgrows its need for the line.
• A fee on the lower of commitment or average usage. This ties the charge to the balance the lender actually lent, not to room you never used.
• A fee-free window before maturity. The last months of the term should be free, so a refinancing can be arranged without either paying the fee or running the facility to its final day.

Ask for the carve-outs while the lender is competing for the deal. At payoff, the agreement is the only thing that speaks.

Planning the move to a bank line

Many businesses enter non-bank asset-based lending as a bridge. The facility is priced for risk, the reporting is heavy, and the goal is a bank line once the business has rebuilt its record. That plan should shape the exit terms from day one.

• Match the step-downs to a realistic recovery. A bank will usually want to see sustained results, often full fiscal years of them, before it lends on cash flow. If the fee is still at its year-one level when the business is ready to move, the schedule was built for the lender's plan, not yours.
• Keep the record a bank will read. Timely borrowing base certificates, clean field exams and reconciled agings are what a new lender reviews first. A clean history with the asset-based lender is evidence.
• Run the break-even before you move. Set the termination charge and other exit costs against the annual savings from the new line. A charge of 200 against savings of 150 a year pays back in about sixteen months. Refinance break-even works through the method.
• Ask whether the new lender will fund the exit. The fee can sometimes be included in the uses of the refinancing. Whether a lender will do that is a judgement on the file.

Term debt raises the same questions through its prepayment terms. Prepayment penalty structures and call protection cover how term lenders protect their yield.

Reading the clause

The fee is rarely labelled consistently. When reviewing a term sheet or loan agreement, search for each of these and read them together:

• Early termination fee, prepayment premium or applicable premium: the main charge and its schedule
• Maximum revolver amount or commitment: the base the fee is calculated on
• Commitment reduction: whether cutting the line triggers a partial fee
• Minimum interest or minimum usage: charges that behave like an exit cost
• Events of default and acceleration: whether the fee is owed if the lender calls the loan
• Termination notice: how many days' notice, in what form, and to whom

Transparent's lender book holds 235 lenders that write asset-based loans and lines, banks and non-banks both. When term sheets come back, the exit terms sit in the comparison beside the spread, the advance rates and the all-in cost, because a line that is cheap to enter and expensive to leave is not cheap for a business that expects to outgrow it.