What is asset-based lending?

Asset-based lending is a type of financing that uses business assets, such as inventory, accounts receivables, property or equipment, as collateral against the loan. 

It’s generally best suited to large companies with an annual turnover of over £5 million. It can work for companies that are asset-rich, have high working capital needs, or are restructuring. 

Read on to find out how asset-based lending works, as well as its pros and cons. 

Key takeaways

• Asset-based lending is a type of financing that uses business assets as collateral

• You can structure it as a term loan or a line of credit

• Assets can include property, inventory, equipment and account receivables 

• If you fail to repay the loan on time, the lender could seize your assets and sell them

• Asset-based lending is best suited to large companies with a high annual turnover

How does asset-based lending work?

You can structure asset-based lending as either a term loan or a line of credit. With a term loan, you receive a lump sum of cash that you repay in monthly instalments over the term of the loan. By comparison, a line of credit enables you to draw on funds as and when required while only paying interest on the amount borrowed. 

The amount you can borrow with asset-based lending depends on the value of the assets used as security. Many lenders calculate this using the loan-to-value (LTV) ratio, which involves dividing the loan amount by the value of the asset. 

However, it can also depend on the type of asset you plan to use. You’re more likely to receive a larger sum if the lender could convert the asset into cash quickly (known as liquidity) should you default on your repayments. Liquid assets can include certificates of deposits and securities.

On the other hand, lenders consider loans using physical assets to be a higher risk. Therefore, if you use a real-world asset – like machinery – you might receive a smaller sum. 

For example, a lender might offer a loan of 85% of the face value of securities, but if you use equipment as collateral, it might only offer 50% of the equipment’s value.

Read more:

• Asset finance

• Types of business loans explained

What assets can you use for asset-based lending?

You can use a range of assets for asset-based lending, including:

• Property

• Plant and machinery 

• Equipment

• Inventory, such as stock

• Receivables, such as invoices

• Intellectual property, such as brand names

Advantages of asset-based lending

The key benefits of asset-based lending are as follows: 

• You can typically borrow more with asset-based lending than other finance options

• You have the flexibility to spend the funds as you wish

• Approval for asset-based lending is usually relatively quick 

• Interest rates tend to be lower compared to other forms of finance

Disadvantages of asset-based lending

There are also several drawbacks to asset-based lending, so keep these in mind:

• The lender can sell the asset(s) to recoup its money if you don’t keep up with your repayments,

• You must undergo a credit check when applying for asset-based lending 

• Late payment and early repayment charges usually apply

Eligibility for asset-based lending

You’re more likely to qualify for asset-based lending if your business is well established and owns valuable business assets, such as equipment or property. Remember that the lender must scrutinise the value of these assets to ensure they are sufficient to secure the loan. 

Furthermore, lenders need to see that your business is financially stable, and they typically assess your credit score to ensure you have a history of repaying debt on time. 

You should also be aware that regulatory authorities oversee the process of asset-based lending. This means an independent third party must conduct an audit of your financial or physical assets. 

What to consider before choosing asset-based lending

Before you apply for asset-based lending, it’s important to consider whether you have assets of a sufficient value on your balance sheet. You also need to think about whether you have detailed financial statements you can use as evidence of your trading history.

Other considerations include how much you need to borrow and how long for, and whether your repayments are affordable. Remember that your assets could be at risk if you fail to keep up with your repayments. Consider the interest rate charged and how much you must pay overall for your loan.  

It may be worth seeking independent financial advice before you consider asset-based lending to ensure it’s right for your business. 

Alternatives to asset-based lending

If asset-based lending isn’t the right solution for your business, there are several other funding sources that you may wish to explore:

Invoice finance

If you regularly invoice customers, invoice finance enables you to borrow up to 95% of your unpaid invoices in advance. You repay the loan once your customers have paid their invoices. 

Revolving credit facility

A revolving credit facility is a flexible borrowing option that allows you to withdraw credit as needed. You usually repay the loan daily, weekly or monthly, and once you repay the credit, you can often draw on the funds again if required. 

Merchant cash advance

A merchant cash advance can provide a short-term funding solution, allowing you to borrow a sum of cash that you then repay using a percentage of your card transaction sales along with agreed fees. For this reason, it’s best suited to businesses that take most of their sales through card terminals.

Business loan

A business loan lets you borrow a lump sum of cash that you repay with interest in monthly instalments over a set term. You can use a business loan to help pay for equipment, new premises, inventory, or even to cover existing debts. 

Cash flow loan

A cash flow loan is a type of short-term financing that lets businesses borrow money based on their expected future cash flow. It can help you cover temporary shortfalls in your business’s cash flow.