What Is a FILO Loan & How Does It Work?

First-In, Last-Out (FILO) loans represent a specialized financing structure within corporate finance, particularly prevalent in asset-based lending (ABL). While not a universally recognized standalone loan type, “FILO loan” specifically refers to a distinct tranche or portion within larger debt facilities. This structure is designed to provide additional liquidity to businesses by leveraging their assets beyond what a traditional senior revolving credit facility might offer. It plays a role in how a company’s debt is prioritized for repayment, especially in situations involving collateral.

Defining First-In, Last-Out (FILO) Loans

The term “First-In, Last-Out” describes a specific repayment hierarchy within a multi-tranche debt facility. In this arrangement, the “first-in” portion of the loan is the “last-out” for repayment from collateral liquidation proceeds. This means that in a default or liquidation, other senior secured debt, such as an asset-based revolving loan, must be fully repaid before the FILO portion receives proceeds. Despite this repayment priority subordination, a FILO loan typically maintains a senior secured first-priority lien on all borrower assets, often sharing the same collateral as the primary revolving credit facility. This structure impacts the risk profile for lenders, as the FILO lender assumes greater risk compared to the primary ABL lender due to its “last-out” position in a liquidation scenario.

How FILO Loan Structures Operate

FILO loan structures primarily function within asset-based lending, supplementing the main revolving credit facility. The repayment waterfall dictates that primary asset-based revolving loans are repaid first from collateral proceeds. Only after these senior “first-out” loans are fully satisfied will the FILO loan begin to receive repayment from the remaining collateral value. This operational hierarchy means that while the FILO loan holds a first-priority lien on the assets, its actual recovery is contingent on the prior repayment of other senior debt.

Collateral for a FILO loan is typically the same as for the senior ABL revolver, including accounts receivable, inventory, machinery, equipment, real estate, and intellectual property. The FILO loan is often fully funded at closing, providing immediate capital to the borrower. Specific triggers, such as a default, can activate the subordination terms, making the FILO loan’s repayment subordinate to other obligations under the same instruments. Borrowers may voluntarily prepay FILO loans, but typically only after the main ABL facility has been fully repaid.

Key Characteristics of FILO Loans

They are typically positioned within the capital structure as subordinate to a senior revolving credit facility but often senior to other forms of junior debt. Despite their last-out repayment priority from collateral proceeds, FILO loans generally maintain a senior secured first-priority lien on the borrower’s assets alongside the primary ABL facility. This shared first lien, combined with their subordinate repayment order, contributes to their unique risk profile.

Due to the increased risk associated with their last-out repayment position, FILO loans typically carry higher interest rates or fees compared to the senior ABL revolver. For instance, a FILO loan might have a margin of 775 basis points over SOFR, while an ABL revolver could be 125 to 175 basis points over SOFR. They are often structured as term loans with specific maturity dates, which can extend beyond the maturity of the primary ABL revolver. While some amortization may be required, FILO loans frequently offer lower maintenance requirements and may not require regular amortization payments, allowing cash flow for other corporate needs.

Common Scenarios for FILO Loans

FILO loan structures are commonly employed in asset-based lending (ABL) environments, providing additional liquidity beyond standard borrowing base availability. They are particularly useful for companies that have significant assets but may experience uneven cash flow, as ABL focuses on asset value rather than solely on consistent cash generation. These loans can provide the extra capital a business needs when traditional bank financing might be limited by asset coverage.

Businesses use FILO loans to finance various strategic initiatives, including funding growth, supporting mergers and acquisitions, or facilitating dividend payments. They can also be instrumental in providing working capital for companies experiencing rapid growth, or for those with seasonal inventory build-ups that require more capital than a standard ABL revolver can provide. Furthermore, FILO loans can serve as bridge financing or support specific acquisition financing, allowing companies to access an additional 10% to 20% more capital than what can be supported by a typical asset-backed structure.