Asset-based lending (ABL) is a type of business loan where the amount you can borrow is linked to the value of the assets your business owns.
Instead of lending based solely on your business credit score or profits, an ABL loan is typically secured by assets such as invoices, inventory, or equipment.
Asset-based lending is often used by UK businesses that want to improve cash flow or access funding that can grow in line with trading.
Asset-based lending vs asset-backed finance
These terms are often used interchangeably, but they mean slightly different things.
Asset-based lending refers to funding in which your borrowing limit is linked to the value of eligible business assets, which can change over time. You will need to regularly monitor and report on the condition of the assets, as the lender needs to track their value and eligibility.
Asset-backed finance is often used as a broad term for any borrowing secured by assets. That can include a wider range of funding, like secured business loans or asset finance, where the amount borrowed is fixed upfront and secured against a specific asset.
How does asset-based lending work?
Asset-based lending works by setting a borrowing limit based on eligible assets, then allowing you to access funding against that value.
It can be set up as a revolving credit facility, where you draw down and repay as needed, or as a term loan, where you borrow a fixed amount and repay it over an agreed term.
The right structure depends on what you’re funding and how predictable your cash flow is. In most cases, the process looks like this:
- The lender reviews your assets and agrees what counts as eligible
- A borrowing limit is set using advance rates
- You draw down funds or take the loan and make repayments
- The lender monitors the facility using regular reporting
Borrowing limit and advance rates
The amount you can borrow is based on a percentage of the value of your eligible assets, known as the advance rate.
A lender may apply one advance rate to invoices and a different rate to stock or equipment. They will also apply eligibility rules, such as only including invoices within agreed payment terms or stock that can be reliably valued.
With a revolving credit facility, the borrowing limit can change over time. It may increase when eligible assets go up in value and decrease if they fall in value or no longer meet the lender’s criteria.
Reporting and monitoring
Lenders typically ask that you keep them updated on asset values so they can monitor the borrowing limit and confirm that the assets are still eligible.
Reporting varies by lender and facility, but it often includes updates on invoices, debtor balances, and payments received. If reporting is late or asset values change, the lender may reduce the available limit.
Reporting is typically monthly, but can be more frequent depending on the facility and the assets used.
What assets can you use for asset-based lending?
A range of assets can be used for ABL, including:
- Invoices and receivables
- Stock and inventory
- Plant and machinery
- Equipment
- Property
- Intellectual property (IP)
Whatever the asset type, lenders will usually consider factors such as how easy it is to value, how quickly it can be converted into cash, and how well the business tracks it.
If assets are difficult to verify, highly specialised, or change in value quickly, they may be excluded or only available at a lower advance rate.
What can you use asset-based lending for?
Asset-based lending can be used for a range of business needs. Because the funding is linked to business assets, it can be a good option when you want finance that supports your day-to-day operations. Common uses include:
- Improving cash flow and day-to-day working capital
- Covering short-term gaps between paying suppliers and receiving payment
- Buying stock or funding larger orders
- Investing in growth, such as hiring, marketing, or expanding into new markets
- Funding equipment upgrades or operational improvements
- Refinancing existing business borrowing to improve cash flow
If you have assets that can support an ABL loan, it could be a practical way to access funding, especially if you don’t have a strong credit score.
Pros and cons of asset-based loans
Asset-based lending can be a flexible way to raise finance, but it comes with some potential downsides. Here are a few advantages and disadvantages to consider before you apply.
Pros of asset-based loans
- Can unlock funding using assets your business already holds
- Borrowing can adjust as your eligible assets increase or decrease
- Can support working capital more effectively than a fixed loan
- Suitable for businesses that are growing quickly but need liquidity
- Can offer larger facilities than unsecured borrowing, depending on the assets available
Cons of asset-based loans
- Ongoing reporting is often required to maintain the facility
- The amount available can fall if asset values drop or assets become ineligible
- Additional management fees may apply, depending on the lender
- Not all assets are acceptable, and advance rates vary by lender and asset type
- As the facility is secured, missed repayments can put your assets at risk
Is your business eligible for an ABL loan?
Eligibility for asset-based lending largely depends on the types of assets your business holds, their value, and liquidity. In most cases, lenders will look at:
- Asset quality: You need to have eligible assets such as property, stock, invoices, or equipment that can be valued and verified.
- Trading history: Evidence of regular trading and stable cash flow, usually shown through recent bank statements and accounts.
- Affordability: Whether the business can cover the costs of the facility and any repayments, even if the asset values fluctuate.
- Credit profile: A director’s and business’s credit history can influence your application and determine the rates and terms you’re offered.
If you’re not sure whether your assets are likely to be eligible, consider how easy they are to value and how quickly they can be converted into cash.
What do you need to apply for an ABL loan?
The process of applying for an ABL loan is usually straightforward, but lenders will need enough information to value your assets and confirm affordability.
What they ask for can vary depending on the type of asset you’re using, but in most cases, you’ll need to provide:
- Business details, including company structure and director information
- The amount you want to borrow and how you plan to use the funds
- Recent bank statements, typically the last 3 to 6 months
- Latest company accounts
- Details of your assets, such as an aged debtor ledger, invoices, stock reports, or an asset list
- Details of any existing borrowing and security already in place
Is asset-based lending right for your business?
Asset-based lending can be a good fit if your business has assets that can help you access the finance you need.
It is often used by businesses that sell to other companies, hold valuable stock, or need working capital that can change as activity increases.
You will need assets that are easy to value and for which you can maintain strong records, because lenders usually require ongoing reporting to keep the facility.
It may be less suitable if you want a simple one-off loan, or if your business has limited eligible assets. In those cases, a fixed-term unsecured loan or another type of business finance may be a better fit.
