What is asset-based lending?

Asset-based lending uses assets on your balance sheet as security against lending.

In this guide you’ll learn how asset-based lending works, the pros and cons of using asset-based lending, and how to go about applying for it.

As with all financial products, it’s a good idea to seek independent, specialist advice before deciding which product is right for your business and circumstances.

What is Asset-based lending?

Asset-based lending is a business financing method that uses an asset owned by a business as security against a business loan.

The lenders evaluate assets such as inventory, accounts receivable, property, or industrial equipment to determine whether a business is eligible for finance.

Some lenders will even consider assets such as intellectual property like brands and patents, when making a lending decision.

The loan amount that a lender is willing to offer a qualifying business is significantly influenced by the value of the asset provided as collateral, among other factors.

This form of lending diverges from other financial solutions, such as unsecured loans, where lenders may place higher emphasis on your company's balance sheet, profitability, and working capital.

For businesses navigating unpredictable markets or those grappling with inconsistent cash flow, asset-based lending could present a viable alternative financing option.

How does asset-based lending work?

Asset-based financing is a service provided by both conventional and online lenders, and it can be set up as either term loans or credit lines.

In this arrangement, the loan offer a business receives from their lender is predicated on the type and value of the collateral you can provide, among other factors.

The loan-to-value ratio (or LTV), a common metric used by lenders, typically determines the funding amount a business can qualify for.

The LTV is calculated by dividing the loan amount by the worth of the asset being used as security.

For instance, if a business is leveraging its inventory as collateral, the lender might be inclined to provide a loan that amounts to no more than 50% of the inventory's value.

In general terms, how easily an asset can be converted into cash in case of default (otherwise known as its liquidity) plays a crucial role in securing higher funding and lower interest rates on a business loan.

As a result, lenders tend to favour collateral that can be quickly liquidated — such as certificates of deposit or securities.

Conversely, physical assets are perceived as riskier due to the challenges associated with their conversion into cash.

What assets can be used for asset-based lending?

A wide variety of assets on a business’s balance sheet could be used as security for asset-based finance.

This includes physical assets such as:

• debtors
• stock
• equipment
• machinery
• property

It can also include intangible assets such as intellectual property (IP).

What are the benefits of asset-based lending?

There are a number of potential advantages to asset-based lending for businesses including:

Scale

It’s possible to unlock higher levels of funding than would be possible using other financial products.

Flexibility

Unlike other forms of finance where they may be extensive financial covenants, there are usually few restrictions on how you can spend the facility.

Quick

If you meet the eligibility criteria, it can take as little as four weeks to receive the money.

Retain control

You can borrow and keep hold of equity.

Options

You can use other forms of finance alongside asset-based lending.

Stable

Your terms for repaying the money you've borrowed can be fixed, allowing for better, clearer planning.

Cash flow

Improve the money you have coming in by leveraging the value of untapped (unencumbered) assets.

What are the risks to using asset-based lending?

Like any financial product, alongside its advantages, there are also potential downsides to a asset-based lending for a business.

Your credit report

Lenders will conduct credit checks and due diligence to determine your eligibility.

A hard credit check will show on your credit report and may affect your credit rating.

Charges

If you default on payments or attempt to pay off the loan early, you may face charges.

Late payments may also affect your credit report.

Potential to lose assets

If you fail to make your repayments, the lender may seize the asset you've put up as security and sell it.

Am I eligible for asset-based lending?

Asset-based financing is a form of lending usually targeted towards established businesses that possess measurable business assets, including but not limited to inventory, equipment, or property, and have a well-documented trading history.

In cases where a business plans to use its inventory as collateral for the loan, it is crucial to demonstrate its market value.

Specifically, in the UK, this refers to the lower of the cost price or the projected sales price after deducting any associated costs for completion and sale.

The specific terms and conditions of an asset-based loan are determined by the value and nature of the assets being pledged.

Factors such as a business’s credit history, cash flow, and the duration for which the business has been operational influence the interest rates applicable on any loan.

It's important to note that the process of asset-based lending is overseen by regulatory authorities.

As part of this regulated process, an independent third party will conduct an audit of your financial or physical assets.

When thinking about applying for asset finance it’s worth considering the following:

Do you have assets of value on your balance sheet?

Their value could reflect the amount of finance you’re eligible for.

Do you have detailed and accurate financial statements covering your trading history?

Asset-based lenders base their decision on:

• your financial performance
• your trading history
• the value and type of assets you hold

In your financial statements, this information must be set out clearly and show your ability to repay the facility.

Do you have commonly sold inventory?

If you’re using stock or inventory as security for lending, you need to show that you've sold it.

This shows you have money coming in regularly to pay off your facility.

How much are you looking for?

Asset-based lenders will consider how much finance you're seeking.

Typically, they provide facilities of £5 million or more.

However, some providers will also offer facilities worth £1 million and above.

What do I need to consider before using asset-based lending?

Here are some important questions you'll need to consider before proceeding with borrowing from an asset-based lender:

• How long is the borrowing period?
• What is the interest rate on the facility?
• What is the advance rate against the various assets?
• How much will I pay for the finance facility in the long run?
• Are there charges for early repayment?

How do I choose an asset-based lender?

There are specialist asset-based lenders in the UK, as well as lenders – including high-street banks – who offer asset-based lending products.

To find out if asset-based lending is right for you, use our finance finder tool.

For a clearer idea of what you need to do to prepare your business for asset-based lending, use our checklist.