A first-in, last-out (FILO) tranche sits inside or alongside an ABL facility when the formula borrowing base does not produce enough availability, but residual collateral or cash flow may support a last-out risk. Financely advises the borrower, packages the file and arranges lender outreach. Financely is not a lender.
What a FILO Tranche Actually Is
In a typical ABL revolver, the lender advances against eligible receivables, inventory and sometimes equipment, then subtracts reserves. That formula is the borrowing base. A FILO tranche can be added when the borrower needs more liquidity than the formula allows. It increases total proceeds, but in a collateral shortfall the first-out revolver is repaid from enforcement proceeds before the FILO is repaid.
A FILO is not a second, independent revolver. It is a structured stretch on the same, or a closely related, collateral package. Pricing, advance logic, reporting and covenants are negotiated because the last-out lender takes a deeper residual risk.
When a Borrower Needs a FILO
A FILO is for a real borrowing base shortfall, not a casual desire for more leverage. Typical situations include inventory that advances conservatively or turns slowly; equipment that supports value but sits poorly in a working capital base; intellectual property that a classic ABL formula treats as ineligible; and a growth, turnaround or acquisition need that exceeds availability.
If the collateral cannot be examined, valued and controlled, a FILO will not repair a weak file. Lenders will not treat it as a substitute for borrowing base reporting.
How Lenders Size and Price It
Lenders start with the first-out formula and the liquidation case: what proceeds remain after the revolver is refinanced or repaid in a downside scenario, and whether that residual, plus cash flow, can support the FILO amount. Sizing mixes collateral coverage after first-out advances, reserves and liquidation costs; the quality of stretch assets (inventory mix, equipment appraisal, or a disciplined view of intellectual property); cash flow support if hard collateral only partly explains the last-out piece; and structure, including term versus revolving, amortization, and whether the FILO shares one credit agreement or sits in a separate facility.
Pricing is wider than the first-out revolver because recovery is subordinated. Exact rates, fees and advance rates are set by lenders after the field exam and credit approval. This page does not quote them.
Intercreditor and Priority Basics
Priority is the point of the product. With counsel, the borrower should understand payment waterfalls versus lien priority, which are not always the same thing; whether the FILO is a tranche inside one facility or a separate last-out lender that needs an intercreditor agreement; enforcement standstill, release and amendment voting; how protective advances, overadvances and cash dominion interact with the last-out piece; and what happens if the borrowing base falls after the FILO has been funded.
Existing first-out lenders often have consent rights. A FILO that cannot be documented with the incumbent lender may require a refinance of the entire ABL, not a bolt-on.
What the Borrower Must Prepare
Lenders will not underwrite a last-out stretch from a teaser. The file should include current borrowing base reports, eligibility rules, ineligibles and reserves, with a bridge from the general ledger to availability; accounts receivable agings, inventory reports and dominion or lockbox mechanics; a recent or concurrent field exam; appraisals where the stretch relies on inventory liquidation value, machinery and equipment, or intellectual property; historical financials, a 13-week cash flow where liquidity is tight, and a model for FILO repayment or refinance; and existing credit and security documents, plus a written use of proceeds.
That package follows the same discipline described in asset based lending credit packaging, with extra emphasis on residual value and priority.
How Financely Helps
Financely acts as advisor and arranger. The work typically includes testing whether a FILO is the right instrument versus a borrowing-base cleanup, a documented overadvance with a clear exit, or a different structure; building the credit pack; and running targeted lender outreach. Credit decisions and funding remain with third-party lenders. Financely does not lend, issue instruments, guarantee obligations or hold client funds.
Frequently Asked Questions
Is a FILO the same as an overadvance?
Not necessarily. An overadvance is often a temporary excess against the existing formula. A FILO is a negotiated last-out tranche with its own size, price and intercreditor terms.
Does a FILO mean the borrowing base no longer matters?
No. First-out availability, reporting and field exams still drive the facility.
Can equipment or intellectual property support the stretch?
Sometimes, if those assets can be valued, secured and defended in a downside case. They are not automatic FILO collateral.
Does Financely provide the FILO?
No. Financely is an advisor and arranger. Funding comes from third-party lenders after their own approval and documentation.
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