Asset-based lending

Definition

Asset-based lending is a form of business financing where a company secures a loan or line of credit using its assets as collateral. Unlike traditional loans that primarily rely on creditworthiness, asset-based lending is based on the value of the company’s assets, such as accounts receivable, inventory, equipment, and real estate.

What is asset-based lending?

Here are the key components and points about asset-based lending:

  1. Collateral-centred: Asset-based lending centres on the value of a company’s assets. Lenders evaluate their quality, liquidity, and marketability to determine the funding amount.
  2. Types of collateral:
    • Accounts receivable: Unpaid invoices from customers are considered a common form of collateral. Lenders may advance a percentage of the total receivables’ value.
    • Inventory: Both finished goods and raw materials can be used as collateral. The lending amount is typically based on the inventory’s current market value.
    • Equipment and machinery: Tangible assets like machinery and equipment can be leveraged for financing.
    • Real estate: Owned properties can be used as collateral, although this is more common in larger, long-term arrangements.
  3. Revolving line of credit: A common structure in asset-based lending is a revolving line of credit. This allows the borrower to take out funds up to a specified limit, repay, and use again, much like a business credit card.
  4. Interest rates and terms: Interest rates for asset-based lending tend to be higher than traditional loans, reflecting the risk involved. 
  5. Flexibility and availability: Asset-based lending can be more flexible than other forms of financing. It is often used by companies facing rapid growth, seasonal fluctuations, or financial challenges.
  6. Risk and benefits: Asset-based lending offers financing but carries the risk of asset loss if the borrower defaults. So, companies should weigh benefits against risks before opting for asset-based lending.

Overall, asset-based lending can be a valuable financing option for companies with substantial tangible assets, providing them with the working capital needed to grow and thrive in their respective industries.

Example of asset-based lending

XYZ Manufacturing is a mid-sized company specialising in producing custom machinery. It has a diverse range of assets, including accounts receivable and inventory.

The company needs additional capital to fund a new product line and improve working capital.

  1. Asset Evaluation:
    • The company’s assets, particularly accounts receivable and inventory, are evaluated. Let’s say XYZ has $500,000 in accounts receivable and $700,000 in inventory.
  2. Asset-based lending agreement:
    • XYZ enters into an asset-based lending agreement with a financial institution. The lender agrees to provide a revolving line of credit based on a percentage of the assessed value of the company’s accounts receivable and inventory.
  3. Loan amount calculation:
    • The lender may offer, for example, 80% of the value of accounts receivable and 50% of the value of inventory. The maximum loan amount would be calculated as follows:
      Loan amount = $400,000 + $350,000 = $750,000
  4. Repayment:
    • The loan is a revolving line of credit, and as XYZ receives payments from customers or sells inventory, it can repay the borrowed amount. Interest is charged only on the outstanding balance.

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Disclaimer: Swoop Finance Pty Ltd (ABN 52 644 513 333) helps Australian firms access business finance, working directly with firms and their trusted advisors. We are a credit broker and do not provide finance products ourselves. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Swoop Finance Pty Ltd can introduce applicants to a number of providers based on the applicants’ circumstances and creditworthiness, we may receive a commission or finder’s fee for effecting such introductions. Swoop Finance Pty Ltd does not provide any kind of advice and in giving you information about providers products, we are not making any suggestion or recommendation to you about a particular product. Offers of finance are subject to a separate assessment process by the provider and subject to their terms and conditions. If you feel you have a complaint, please read our complaints section which is contained within our terms and conditions.

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