Asset-Based Lending: Definition, Examples, Pros and Cons
Asset-based lending can be a good option for businesses that need access to working capital and have strong assets.
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Managing Editor Key takeaways
- Asset-based lending lets you secure funding by using your company’s assets as collateral.
- Because the collateral reduces risk for the lender, this financing can be easier to qualify for than other business loan options.
- If you default on the loan, your lender can seize and sell your assets to recover its losses.
Strong assets can be more than tools for running your business — they can also help you access financing. Asset-based loans let you leverage those assets to secure the funding you need.
What is asset-based lending?
Asset-based lending (ABL) is when a lender issues you a loan that is secured by some form of collateral, such as inventory, accounts receivable, equipment or real estate, among other business assets.
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How does asset-based lending work?
Both traditional and online lenders offer asset-based loans, typically structured as term loans or lines of credit. Here’s how they work:
1. Secure the loan with your assets.
To qualify for one of these loans, you’ll use business assets as collateral.
2. The lender evaluates your assets.
Your loan offer is based largely on the type and value of your collateral, along with your overall qualifications.
3. The lender calculates your loan-to-value (LTV) ratio.
The loan-to-value ratio is calculated by dividing the loan amount by the value of the asset you’re putting up as collateral. If you’re using inventory as collateral, for example, your lender may offer a loan of up to 50% of its value.
In general, the more liquid your collateral, the more likely you are to receive higher funding amounts and lower business loan rates.
Lenders prefer you to put up highly liquid collateral — such as certificates of deposit or securities — because it can be easily converted to cash if you default on your loan. Physical assets, on the other hand, are considered more of a risk.
Asset-based lending example
Let’s say your business is looking for a $100,000 loan to grow your operations. You apply for financing from an asset-based lender and plan to secure your loan with marketable securities (e.g., stocks, bonds, preferred shares).
Your lender agrees to offer a loan equal to 85% of the value of your marketable securities. If your marketable securities have a value of $120,000, the lender can provide a maximum loan amount of $102,000.
If, however, you wanted to secure your loan with inventory, the lender may only offer 50% of the value of that collateral. In this scenario, even if your inventory was also worth $120,000, your maximum loan amount would fall to $60,000. That's $40,000 less than what you’re looking to get.
This difference shows how the type of asset you pledge can significantly impact how much you’re able to borrow.
Asset-based lending vs. cash flow lending
Whereas asset-based lending allows you to borrow money based on the value of your collateral, cash flow lending — also referred to as traditional business lending — allows you to borrow based on your business’s future cash flow.
Here’s an overview of the differences between these lending types:
| Asset-based lending | Cash flow lending |
| Requires collateral. | Doesn’t necessarily require collateral. |
| Eligibility determined based on the value of your collateral. | Eligibility determined based on your current and future finances, as well as credit history. |
| Fewer financial covenants. Covenant requirements are conditions that you (the borrower) must meet throughout the term of your loan to show your creditworthiness to the lender. | More financial covenants required. |
| Can be easier to qualify for, even if you have a rocky credit history. | Can be more difficult to qualify for, especially if you have poor credit. |
Best asset-based lenders
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Benefits of asset-based lending
Here’s why you might consider an asset-based loan for your business:
- Can be easier to qualify. With asset-based lending, the lender focuses largely on the value of your collateral when evaluating your loan application. If you have strong assets to offer, you may still be able to access financing even if you have unstable cash flow or a rocky credit history.
- Competitive interest rates. Because your collateral mitigates risk for the lender, you’ll likely receive lower interest rates on an asset-based loan compared to unsecured business loan options.
- Flexible financing. Asset-based loans can be used for a variety of purposes, including managing cash flow gaps, covering operating expenses and investing in new opportunities. Asset-based lenders don’t typically restrict your use of funds, making these loans a good option for a range of different small businesses.
Disadvantages of asset-based lending
Here’s why an asset-based loan may not be the right fit for your needs:
- Certain assets may not qualify as collateral. Some of your business assets may not be eligible collateral for an asset-based loan — and ultimately, this determination will be made by your lender. For instance, lenders may turn down specialized goods, perishable inventory or equipment with a high depreciation rate.
- Additional fees. Although these products may have lower interest rates than other financing options, additional fees can drive up loan costs. You may have to pay fees associated with evaluating and monitoring your collateral, such as origination fees, audit fees and due diligence fees.
- Putting your assets at risk. If you default on your loan, your lender can claim and sell your business assets to repay the debt and recoup its losses.
Learn more about different types of asset-based lending:
Frequently asked questions
What is an example of asset-based lending?
Examples of asset-based lending include accounts receivable financing, equipment financing, inventory financing and commercial real estate financing.
How do you qualify for an asset-based loan?
To qualify for an asset-based loan, you’ll need to put up high-value collateral — ideally an asset with a low depreciation rate that can be quickly converted to cash. It’s also helpful to have a good credit and financial history. Ultimately, the qualifications that you’ll need to meet will vary based on the specific loan product and lender.
What is the difference between an asset-based loan and a hard money loan?
The main difference between asset-based loans and hard money loans is that hard money loans are almost always secured by real estate. Asset-based loans, on the other hand, tend to use more liquid collateral, such as accounts receivables. Hard money loans, however, are a form of asset-based lending.
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