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Expanding your business often requires an influx of capital. Unsecured business loans, cash-flow loans, and asset finance are three popular and familiar options to expand or maintain small and medium sized businesses, with external investment providing an additional way to generate new capital.
There can come a time, however, where those avenues are unsuitable. Asset-Based Lending (ABL) offers an additional way for growing businesses to get the capital they need to grow.
What is Asset-Based Lending?
Asset-based lending is a secured loan where a number of the business’s assets are provided as collateral for the borrowing. Should the company fail to make payments, the lender is able to seize the assets.
A standard mortgage is a type of asset-based loan. Here, your house is the asset in question, which the mortgage lender retains the right to repossess should you fail to keep up with your monthly mortgage repayments.
Business asset-based loans are guaranteed in a similar way, though the assets need not be a building. Some of the other assets that lenders will consider include machinery, equipment, or stock.
An asset-based loan will provide your business with substantial capital to use as required, being paid back regularly until it is repaid in full. Like all borrowing, asset-based loans are subject to interest though this rate is typically lower than with an unsecured loan due to the increased security for the lender.
What is the Difference Between ABL and Cash-Flow Loans?
Like asset-based lending, cash-flow loans are a secured loan option available to businesses. With cash-flow loans, however, the lender is looking at the company’s accounts receivable – the amount of money that has previously been invoiced. It is this value that is used as a security rather than the value of the company’s hard assets.
Cash-flow loans, also known as invoice finance or working capital loans, are better for companies that don’t have many assets but do have good profit margins. The service industry is one example of a sector that typically would look to working capital loans.
Asset-based lending, by comparison, is better for businesses with a strong balance sheet but might have a more unpredictable cash flow.
For more information, consider reading our guide to working capital loans.
Why Choose Asset-Based Lending?
There are several reasons to choose asset-based lending:
An unsecured business loan is unsuitable
Unsecured loans lean heavily on business credit history which may be poor or simply not well established. Many successful businesses are unable to fulfil the criteria for an unsecured loan despite being confident in their ability manage repayments. Unsecured loans are also limited in size and may simply not be suitable for the required level of capital, plus the interest rate on an unsecured loan will be higher than an equivalent asset-based loan.
Cash-flow lending is inappropriate
Like an unsecured loan, cash-flow lending will have a higher rate of interest than an asset-based loan. Additionally, a cash-flow loan is linked to the size of the accounts receivable, which may prove too small for the capital need. If the company has suitable hard assets, it is unlikely that a cash-flow loan proves more suitable.
The financing is for more than just assets
When the financing required is to obtain equipment, vehicles, or other assets, it may be more suitable to look at some of the asset finance options available. However, asset financing cannot provide a business with direct capital for investment in other areas, such as personnel or marketing.
External investment is unwanted
Investors are a very strong way to increase capital but the transfer of equity is not always something a company owner is willing to give up. Investors may ask too high a percentage of the business, or be looking for control over the business and its future. Asset-based lenders never take a direct interest in the company.
The size of capital needed is high
Asset-based lending is an excellent way to increase capital by a significant amount. With the total loan value tied to the hard assets of the company, it is often possible to obtain a far greater amount through ABL than other types of financing.
Interest is low
As mentioned previously, as the lender has the assets available as collateral, the interest rates for asset-based lending are typically lower than other finance options. This can have a considerable impact in the long-term.
Asset-based finance is flexible
With less stringent criteria and a revolving line of credit that can grow as the assets increase, the flexibility of asset-based finance provides an extra enticement for companies that regularly utilise credit options.
Assets are still required
One other option available to businesses looking to leverage their assets for additional capital is to sell those assets. While this remains a viable option for some, this is, of course, unsuitable for companies who still need to use that asset to conduct business.
What Are the Downsides of Asset-Based Lending?
As with all borrowing, ABL is not without its negatives.
- Long-term cost – As it is a loan and will accrue interest, the long-term cost of asset-based lending is greater than some other forms of capital investment. If the ABL is used to purchase additional assets such as machinery, these will depreciate over time and the final value of assets is unlikely to match the overall cost of the investment.
- Assets at risk – Putting your assets up for collateral can often sound like a win-win situation, especially if you are confident in your ability to regularly make payments, but the risk of seizure does exist and lenders will call on your asset-based guarantees should you fail to maintain repayments.
- Interest rate changeability – Some asset-based loans will be fixed, but others may be on a variable rate. Changes to the base interest rate, as has happened throughout 2022 and 2023, can have a significant impact in the cost of your asset-based loan.
- Assets are linked – Though you still own your assets, you cannot sell or exchange them in any way without prior agreement with the lender. Selling the asset may require the full repayment of the loan or a replacement loan to replace it.
How Much Can You Borrow with ABL?
Loan-to-value (LTV) is the largest consideration with asset-based finance, though your credit rating and financial history will also be taken into account when determining the final value of your loan.
If your credit score is strong, loans with LTV of 75% to 90% can be obtained. Businesses with a weaker credit rating would be more likely to be offered asset-based loans with an LTV between 50% and 75%.
The value of your assets does require a period of due-diligence by the lender. They will want to see all relevant accounting and full appraisals of your assets.
It is also important to note that assets can only be used as collateral for a single asset-based loan. Second loans linked to the same assets will be in breach of your loan contract and may be illegal.
Getting an Asset-Based Loan with Cashflow Solutions
At Cashflow Solutions, we can offer asset-based loans at competitive rates. Our team will work with you to get the lowest interest rates and best loan-to-value for you to propel your business forward.
Contact us today for advice and further information.
Working in partnership with our lending partners backed by the British Business Bank to deploy funds to support business growth and working capital
