An airball is the part of a loan that exceeds the lender's collateral value: the loan amount minus what the lender believes it could recover by selling the assets, after its advance rates. If collateral supports 1,500 and the loan is 2,500, the airball is 1,000. Cash-flow lenders accept an airball because they are repaid from earnings and rely on the value of the business as a whole. Asset-based lenders do not, because their model is repayment from the collateral. That is why larger deals often split into an ABL revolver and a term loan.
- Definition
- Loan amount minus the lender's discounted collateral value
- Also called
- Collateral shortfall; the uncovered or under-collateralized portion
- Who accepts it
- Cash-flow lenders, unitranche and mezzanine lenders
- Who avoids it
- Asset-based lenders, whose advances follow the borrowing base
- What covers it
- Earnings, the going-concern value of the business, guarantees
- What it costs
- Higher pricing, tighter covenants, faster amortization
How the airball is measured
A lender does not value collateral at what it appears on the balance sheet. It asks what it could collect if it had to sell, and then lends a share of that. Receivables are discounted for disputes and slow payers, inventory for what a liquidator would get, equipment for an orderly sale, real estate for an appraisal. What is left is the lender's collateral value. The airball is whatever the loan exceeds it by.
An example in plain numbers, for a distributor borrowing 2,500 to fund an acquisition:
| Asset | Book or appraised value | How a lender discounts it | Lendable value |
|---|---|---|---|
| Eligible receivables | 1,000 | Advanced at 85%, inside the typical 80% to 90% | 850 |
| Inventory | 900 at cost | Up to 85% of net orderly liquidation value, roughly half of cost | 450 |
| Equipment | 400 appraised | A share of orderly liquidation value | 190 |
| Goodwill and customer relationships | Most of the purchase price | Nothing: no liquidator pays for it | 0 |
| Total lendable value | 1,490 | ||
| Loan requested | 2,500 | ||
| Airball | 1,010 |
Two things in that table decide most airballs. Goodwill is worth nothing to a collateral lender, and in an acquisition goodwill is usually the biggest thing being bought. And the discounts compound: a receivable that is disputed, aged, or owed by one oversized customer drops out of the borrowing base entirely.
Why cash-flow lenders accept it
A cash-flow lender underwrites the business's ability to repay from earnings. Its first question is debt service coverage, and its sizing tool is a multiple of EBITDA: senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and unitranche lenders stretch further. It takes a lien on all the assets, but it does not expect the assets alone to repay it. It expects the business, as a going concern, to be worth more than the debt, and it knows that if things go wrong the best recovery usually comes from selling the company whole rather than liquidating it.
So a cash-flow lender will lend into an airball, but it prices and protects for it. Expect a higher rate than an asset-based line, maintenance covenants on leverage and coverage, required amortization, a personal guarantee in smaller deals, and closer attention to the durability of earnings: customer concentration, owner dependence, and whether EBITDA is real or adjusted.
Why asset-based lenders do not
An asset-based lender works the other way round. Its loan is a revolver sized by a borrowing base: a stated share of eligible receivables and inventory, recalculated every time the borrower submits a borrowing base certificate. Repayment comes from collecting those receivables and selling that inventory. The lender watches collections, often controls the cash through a lockbox, and audits the collateral in the field. That discipline is why ABL can lend to companies that a cash-flow lender would not, including businesses with thin or negative earnings.
The same discipline means the ABL lender has no appetite for an airball. When it does lend above the base, it calls it an overadvance: a temporary, priced amount with a date to come back inside the formula. A permanent airball is not something an asset-based lender is set up to hold. The trade-offs are laid out in asset-based line vs cash-flow line of credit.
How the airball shapes the structure
When a deal needs more than the collateral supports, the airball decides who does what. The common answers:
| Structure | Who holds the airball | Fits when |
|---|---|---|
| ABL revolver alone | Nobody: the loan stays inside the base | The need is working capital that rises and falls with receivables and inventory |
| ABL revolver plus term loan | The term lender, lending on cash flow | Assets support a large revolver and earnings support the rest |
| Unitranche | One lender, across the whole loan | Earnings are strong and the borrower wants one document and one relationship |
| Senior loan plus mezzanine or seller note | The junior lender, behind the senior | Senior lenders reach their leverage limit before the price is covered |
The split structure deserves a closer look because it is where the airball is most visible. The ABL lender takes a first lien on receivables, inventory and cash; the term lender takes a first lien on equipment, real estate and intangibles, and a second lien on the ABL's collateral, with the reverse for the ABL lender. An intercreditor agreement sets out who gets paid from what. Each lender prices its own risk: the revolver cheaply, because it is covered, the term loan higher, because it holds the airball. How an ABL revolver and a term loan share collateral walks through the documents.
Making the airball smaller, or easier to lend
- Clean up the receivables. Collect or write off old invoices, resolve disputes, and reduce reliance on one customer; each lifts the eligible base.
- Get the appraisals. An equipment or real estate appraisal often shows more lendable value than the balance sheet does.
- Put more equity or seller financing in. A seller note or rollover sits behind the senior lender and shrinks the part the senior lender has to carry.
- Prove the earnings. A cash-flow lender will hold an airball it believes in. Clean monthly figures, a reconciled EBITDA and a clear debt schedule do more than any argument.
- Match the lender to the gap. Of the 1,800+ lenders in Midas Partners's book, 235 write asset-based lending and lines and 1,148 write term and private credit. A deal with a big airball goes to the second group, or to both as a split.
A lender reviewing a deal with an airball wants to see both halves of the answer at once: what the collateral covers, and what earnings and enterprise value cover beyond it. Laying out the lendable value next to coverage and leverage lets each lender see which part of the loan it is being asked to hold and what repays it.
Common questions
- Is an airball the same as an unsecured loan?
- No. The loan is usually secured by all the company's assets. The airball is the part the lender does not expect those assets to cover if they had to be sold. It is under-collateralized, not unsecured.
- Why won't my ABL lender just lend more?
- Because its whole model is repayment from collateral it can measure and collect. Lending above the borrowing base means lending on cash flow, which is a different credit decision, priced and monitored differently. Some ABL lenders offer a short overadvance; a lasting gap belongs with a term lender.
- Does goodwill count as collateral?
- Lenders take a lien on it, but they give it no lendable value because it cannot be sold apart from the business. In an acquisition, goodwill is typically most of what creates the airball.
- Does an airball always mean a personal guarantee?
- Not always. Guarantees depend on the size of the loan, leverage, the lender and whether a sponsor stands behind the company. Larger, well-supported cash-flow loans are often made without one; where a guarantee is asked for, its amount and duration are terms worth comparing across offers.
- Can a split ABL and term loan structure cost less than one loan?
- Often it can, because the revolver is priced as a covered, asset-backed loan and only the term loan carries airball pricing. It adds a second lender, an intercreditor agreement and borrowing base reporting, so it tends to suit companies with substantial receivables and inventory.