Asset-based lending

Page written by AI. Reviewed internally on January 22, 2024.


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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