What is asset-based lending?

Understanding asset-based lending and its uses

Asset-based lending is a form of business finance that uses existing business assets to secure loans or flexible lines of credit. With a range of business assets being accepted by lenders, it provides flexibility and helps you to access vital funding.

The amount of financing available to you is partly based on the value of the asset(s) put forward but you can use a range of balance sheet assets, with some lenders even accepting intangible assets such as intellectual property.

So how does asset-based finance work and what types of assets can you use?

How does asset-based funding work?

Mainstream and alternative lenders both offer asset-based loans and lines of credit. They typically assess your eligibility and lending amount based on the value of the asset - the loan-to-value (LTV) ratio.

This differs from ‘traditional’ unsecured business loans where your profitability and other criteria come into play. The asset’s liquidity is also a key feature for lenders, as if you default on payments they would want to be able to convert the asset into cash relatively quickly.

What types of assets can you use for asset-based borrowing?

Sales ledger

Invoice finance uses the value locked inside your sales ledger to improve cash flow and boost growth. This could be a suitable option if you operate a strong sales ledger with few late payers and have minimal bad or doubtful debts.

Equipment/plant and machinery

Business equipment and heavy plant and machinery, such as that used in the construction industry, can generate significant funding given their typical high values.

Inventory

Depending on your type of business your stock holding may be straightforward for valuation purposes. If you’re a manufacturer, your inventory will consist of raw materials, work-in-progress (WIP), and finished goods.

Property

Although not quickly convertible to cash, being of extremely high value means property can be used to secure vital funding.

What are the advantages of asset-based funding?

• Flexibility: there are few restrictions on how you can spend the funding, offering valuable flexibility for your business. You can also use asset-based lending alongside other forms of finance.
• Fast access: asset-based lending can provide quick access to finance depending on the asset used
• No loss of equity: unlike some other financing options, you don’t lose any equity in your business
• Improved cash flow: invoice finance, in particular, improves the monthly through-put of cash and can stabilise day-to-day operations by improving your company's working capital
• Certainty of budgeting: negotiating fixed terms with your lender offers predictable budgeting

How to apply for asset-based lending

With so many traditional and alternative lenders now offering asset-based lending, it’s important to ensure you choose the most suitable product for your business. Professional guidance via a commercial business finance broker is key in this respect.

UK Business Finance scours the whole of the market to find the most appropriate type of lending for our clients. We can advise on eligibility and suitability to ensure your business accesses all the benefits available. Contact our expert team to see how we can help.