Advantages and disadvantages of asset-based lending

Understanding the pros and cons of asset-based lending

Asset-based lending allows businesses to use their existing balance sheet assets as collateral to secure funding. It’s a popular form of alternative finance that focuses on the value and liquidity of an asset rather than the business’s creditworthiness.

Although there are many advantages to taking out an asset-based financing option, it’s also important to understand the downsides and take a balanced view of its suitability for your business.

So what are the pros and cons of asset-based lending? Let’s look at some of the pros first.

Advantages of using asset-based lending to fund your business

Range of assets can be used as security

Assets that can be used include inventory, accounts receivable, plant and machinery, business equipment, and property. This means that businesses in a wide range of industries, including manufacturing, construction, and retail, can access asset-based borrowing.

Quick access to funding

Acceptance for the finance facility relies on the value and liquidity of an asset rather than the company’s creditworthiness, so lending can typically be sanctioned quickly compared with ‘standard’ business loans. This enables businesses to rapidly implement their plans for growth or deal with unexpected financial issues.

Favourable loan terms and conditions

As the loan is secured by an existing asset, the lender may offer more beneficial terms than on an unsecured loan. These could include a lower interest rate, for example, a higher loan amount, or a longer term, all contributing to more affordable borrowing.

No restrictions on usage

Asset-based lenders typically impose few or no restrictions on how the loan can be used. This flexibility can be crucial for businesses looking to expand over a long term whilst also maintaining healthy cash flows and a strong operational capacity day-to-day.

What are some of the disadvantages of asset-based finance?

Risks of default

If the business defaults on repayments the lender will take possession of an asset essential to its operations. Additionally, there’s no guarantee that the value at that time would cover the remaining loan balance.

Potentially limited funds

Funds may be limited under an asset-based lending agreement as loans are partly based on a loan-to-value (LTV) ratio determined by the lender. If the loan provider identifies a specific risk, such as the potential for late payments in an invoice finance deal, the funds offered may be insufficient for the company’s needs.

May not be suitable for smaller businesses

Asset-based finance may be unsuitable for smaller businesses with a limited asset base or start-ups with few assets in general. Lenders rely on an asset’s value and liquidity when sanctioning borrowing, which may limit its appeal and suitability for some businesses.

How are asset-based loans used?

Asset-based loans can be used for a variety of purposes, such as boosting cash flow or investing in business expansion, helping businesses to implement longer term plans with more confidence and grow in a sustainable way.

If you would like more information on the advantages and disadvantages of asset-based lending, please get in touch with UK Business Finance. We are leading business finance brokers and will guide you towards the most suitable funding for your business.