Asset-Based Lending

Asset-based lending is a type of business financing where a company offers its owned assets as collateral to secure a loan. Lenders evaluate these assets, which can include inventory, accounts receivable, real estate, or industrial equipment, to determine the business’s eligibility for funding.

How does asset-based lending work?

Asset-based financing is offered by both traditional and online lenders, and it can take the form of term loans or lines of credit. It can be especially helpful for businesses facing uncertain market conditions or dealing with fluctuations in cash flow, providing them with a flexible way to access funds.

The amount of financing a business can secure depends on the type and value of the collateral provided, along with other considerations:

• lenders commonly use the loan-to-value (LTV) ratio to decide the funding amount a business qualifies for. This ratio is calculated by dividing the loan amount by the value of the asset used as collateral  
• the liquidity of the collateral, or how easily it can be converted into cash in the event of default, is a key factor in determining both the size of the loan and the interest rate  
• liquid assets, such as certificates of deposit or securities, are typically preferred by lenders as they can be quickly sold  
• physical assets are often viewed as higher risk due to the challenges involved in converting them into cash.

What are the benefits?

There are several potential benefits of asset-based lending for a business including:

• scalability: asset-based lending tends to yield higher levels of funding than other financial products due to its secured nature
• flexibility: there are relatively few restrictions on how a business spends the funding when compared to other forms of finance
• speed: providing a business meets the eligibility criteria, applying can take as little as a few weeks
• control: unlike equity finance options, you retain complete control of the business
• stability: due to the repayment terms and schedule between the business and the lender being fixed, it’s possible to forecast future financial requirements with confidence
• efficiency: by leveraging the value of untapped assets in addition to their primary business purpose, it’s possible to unlock further funding for your business 

What are the potential drawbacks?

Like all finance types, there may be drawbacks to using asset-based lending for your business:

• credit report: when assessing your application, a lender will conduct a credit check to determine your eligibility. This will show up on your credit report and could impact your credit rating
• charges: if a business defaults on its repayment schedule, it could incur charges. This may also be the case if a business wants to repay the balance early
• risk: if a business defaults on repayment, the lender may seize the asset that has been put up as security against the funding.

How do I access asset-based lending?

Asset-based lending is offered both by specialist providers and more general lenders, including high-street banks.