What is asset-based lending?
A form of asset-based finance that uses assets on your balance sheet as security against 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:
It can also include intangible assets such as intellectual property (IP).
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.
Enter your postcode to find business support and case studies from businesses within your region. You'll be taken to our interactive map.
Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
Making business finance work for you
Starting a business doesn’t come with a set of instructions.
We know that understanding the many different types of financial product in the marketplace can be difficult.
Our Making business finance work for you guide is designed to help you make an informed choice about accessing the right type of finance for you and your business.