Table of Contents
- What Does Asset-Based Lending Mean?
- What Can You Use as an Asset?
- How Does It Work?
- Why Must Businesses Use Asset-Based Lending?
- What Kinds of Businesses Use It?
- What Are the Pros and Cons?
- Asset-Based Lending vs. Traditional Loans
- Is It the Same as Invoice Finance?
- How Much Does It Cost?
- What Happens If You Can’t Pay?
- How Do I Apply for Asset-Based Lending?
- When Is Asset-Based Lending a Good Idea?
- Final Thoughts
Key Takeaways
- Asset-based lending is a type of loan that uses your business assets (like stock, equipment, or invoices) to get money.
- You don’t need a perfect credit score to qualify, your assets do the talking.
- It can be great for businesses needing fast cash or waiting on customer payments.
- You keep control of your business while using what you already own to stay strong or grow.
What Does Asset-Based Lending Mean?
Let’s start with the name:
- Asset means something your business owns.
- Lending means borrowing money.
So, asset-based lending means borrowing money using your business’s stuff (assets) as a promise to pay the lender back.
Here’s an example:
Imagine your company sells chocolates. You have a big warehouse full of chocolates and candies. They are your inventory, one kind of asset and another kind of asset would be the trucks you use to deliver these candies to stores so they could sell them; another would be your chocolate machine. A lender might say, “I’ll lend you money, and if you can’t pay me back, I’ll take one of your assets instead” but only if you agreed to use that asset as collateral. That’s asset-based lending!
What Can You Use as an Asset?
Businesses have many types of assets. These are the most common ones lenders accept:
- Invoices (money customers still owe you)
- Inventory (products or materials you plan to sell)
- Equipment (tools, machines, or vehicles you use)
- Real Estate (property or land your business owns)
Lenders will check how much these assets are worth. Then they decide how much money to lend you.
Some lenders may also accept intellectual property, like trademarks or patents, if they hold value. Lenders usually prefer assets that can be turned into cash quickly, like invoices or inventory. –British Business Bank
How Does It Work?
By this time, you have already considered getting an asset-based lending. Now, all you need to do is follow these steps:
Step 1: Choose Your Assets
Pick the assets you want to use; these could be your invoices, your equipment, or your stock of goods (inventory).
Step 2: Get a Value Check
The lender looks at your assets and says, “These are worth £100,000.” They won’t lend you all of that amount, just a percentage, like 80% or 90%.
So, if your invoices are worth £100,000, you might get a loan of £80,000 or £90,000 based on the lender’s risk assessment and what type of asset that is.
If this is for inventory, then the lenders will need to see if you can really indeed sell that type of inventory fast as proof you can pay.
Step 3: Use the Money
You can use this loan to pay bills, buy new supplies, or cover other business needs.
Step 4: Pay Back Over Time
You pay the lender back with interest. If you can’t pay, the lender will take the assets you used as security.
Note: Lenders use something called a loan-to-value ratio (LTV) to decide how much to lend. This means they’ll give you a percentage of what the asset is worth. If your stock is worth £100,000, you might get a loan for £50,000. Assets that are easier to sell, like cash or stocks, usually get you better deals.
Why Must Businesses Use Asset-Based Lending?
A recent survey by Time Finance found that while many business owners have heard of asset-based lending (ABL), only 2 out of 10 are actually using it. Phil Chesham, a leader at Time Finance, explained that ABL is a smart way for businesses to get money by using what they already own, like equipment or stock. He said, “ABL is one of the most versatile and creative finance solutions available to businesses because it allows them to access capital tied up in their existing assets.” This means businesses can grow and manage their money better by using their own assets.
Helps with Cash Money Moving Through Your Business
Sometimes you wait weeks or months to get paid by customers. That can hurt your cash flow. With asset-based lending, you get money now, based on those unpaid invoices.
Good for Growing Businesses
When your business is growing, you might need more money for stock or hiring staff. Asset-based loans can give you quick cash without waiting for profits.
You Don’t Need Perfect Credit
Even if your business had money problems before, you might still qualify. Why? Because the loan is based on your assets, not just your credit history.
What Kinds of Businesses Use It?
- Manufacturers – They need money for raw materials and machines.
- Wholesalers – They have lots of products in stock.
- Retailers – They use inventory and invoices as collateral.
- Service Companies – They get paid later but need cash now.
It’s also great for seasonal businesses. For example, a Christmas shop may sell most of its stock in December. Asset-based lending can help during the slow months.
What Are the Pros and Cons?
Let’s look at the good things and not-so-good things about asset-based lending.
Pros
- Fast Access to Money – Often quicker than a bank loan.
- Flexible – You can borrow more as your assets grow.
- Keeps You Going – Helps during slow sales or while waiting for customers to pay.
- No Restrictions of Fund Use – unlike traditional loans, you are free to do whatever you want with the funds.
Cons
- You Need Valuable Assets – Not every business has them.
- Limited Borrowing Capacity – The higher amount you need the more valuable the asset must be.
- Potential Loss Over Assets – If the worst case scenario comes, the lender has the rights to seize them and you lose ownership.
- Frequent Checks – Lenders will check on your financial reporting from time to time.
Asset-Based Lending vs. Traditional Loans
You might ask, “Why not just get a regular loan from the bank?”. So, if you own valuable assets but do not have enough money to buy the necessary supplies to keep the business running, asset-based lending might be a better fit.
Is It the Same as Invoice Finance?
Invoice finance is one type of asset-based lending. It’s when you use your unpaid invoices to get cash now instead of waiting.
There are two main types of invoice finance:
- Invoice factoring – The lender manages your invoices and collects from your customers.
- Invoice discounting – You collect the payments yourself but get cash early.
Both help you turn invoices into money fast.
How Much Does It Cost?
Costs can vary. You may pay:
- A setup fee
- A service fee (monthly or yearly)
- Interest (like you do with most loans)
Some lenders charge more if your assets are risky. For example, if your customers often pay late, the lender might see your invoices as high-risk.
Ask questions before signing anything. Always know the full cost.
What Happens If You Can’t Pay?
If you don’t repay the loan, the lender can take the assets you used as security. That might mean:
- Taking your goods or inventory
- Collecting money from your customers
- Selling your equipment
This is why it’s important to only borrow what you can afford.
How Do I Apply for Asset-Based Lending?
Here’s what most lenders want to see:
- List of your assets (like invoices, stock, or machines)
- Proof of who owes you money (if using invoices)
- Details about your business (bank statements, accounts)
- A business plan (sometimes)
The lender checks this and decides how much they’ll offer you.
When Is Asset-Based Lending a Good Idea?
It can be a good choice when:
- You have valuable assets
- You need cash quickly
- You’re growing fast
- You’re waiting for big payments
It’s not a good idea if:
- You have no valuable assets
- You can’t afford to repay
- You want a long-term loan for buying something big like a building
Final Thoughts
If your business has good assets like stock, equipment, or invoices this type of loan can help you stay strong, grow faster, and feel more in control.
Asset-based lending is an underrated way for many businesses to get fast, flexible funding. Instead of waiting for customers to pay or trying to get a bank loan, you can use what your business already owns to unlock cash now.
FAQ’s
1. What is asset-based lending?
It’s when a business borrows money using things it owns — like invoices, stock, or equipment as security.
2. What can I use as an asset?
You can use things like unpaid invoices, inventory, machines, vehicles, or even business property.
3. How much money can I borrow?
It depends on how much your assets are worth. You can usually borrow 50–90% of their value.
4. Do I need good credit to get this loan?
No, only the collateral is needed.
5. Is asset-based lending the same as invoice finance?
Invoice finance is one type of asset-based lending. It uses unpaid invoices to get cash now.
6. Can I still collect payments from my customers?
Yes, if you’re using invoice discounting. But if it’s factoring, the lender collects for you.
7. What happens if I can’t pay the loan back?
The lender seizes your assets being used as collateral.
8. How fast can I get the money?
Some lenders can give you the money in just a few days, once your assets are checked.
9. What does it cost?
You’ll pay interest and maybe other fees, like service or setup fees. Always ask for full costs.
10. What’s the difference between invoice discounting and factoring?
In Invoice Discounting you still collect invoice from customers while in Factoring, a lender (factoring company) collects for you.
