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• 25 Mar

  What Is Asset Based Lending A Guide To Raising Money Against Assets

  Asset-based lending (also called ABL) is a way of leveraging all a company's assets to maximise the amount of finance that the company can raise.

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  What Is Asset-Based Lending? A Guide To ABL Raising Money Against Assets

  Often financing can connected to one or more types of assets that a company owns. The guiding principle of asset-based lending is that it takes into consideration a broad spectrum of different company assets to maximise the amount of finance that can be released.

  In some cases, the individual assets may not have been worthy of funding individually, e.g., stock, but as part of a blended asset mix they enable the financier to release additional cash.

  Understanding Asset-Based Lending

  Asset-based lending (ABL) is a financial strategy used by businesses to secure capital by leveraging their existing assets. This form of financing is primarily focused on using tangible and occasionally intangible assets as security to obtain finance. Unlike traditional loans, which may require a strong credit history or cash flow records, asset-based lending offers businesses an alternative route to access needed funds based on the value of their assets. This flexibility makes ABL an attractive option for companies looking to maintain liquidity or finance growth initiatives.

  See our related article: A Simple Explanation Of Asset-Based Finance.

  Which Assets Are Included?

  In an asset-based lending arrangement, lenders evaluate the company's assets to determine how much can be lent. Asset classes include:

  • Book debts or accounts receivable
  • Stock, raw materials and inventory
  • Commercial property
  • Plant, machinery and equipment

  The value of these assets typically dictates the borrowing capacity. Lenders will perform a thorough assessment, often including appraisals and audits, to ascertain the worth and liquidity of the assets being pledged. This evaluation not only ensures that the lender is protected but also allows businesses to unlock capital that may otherwise remain untapped.

  ABL Funding Formula

  The asset based loan provider will set an ABL funding formula against the mix of assets being pledged. This will normally include a funding percentage against each class of assets. For example, the funding percentage against accounts receivable may be much higher than that against say stock which might be considered a harder asset to liquidate.

  Types Of Assets Used In Asset-Based Lending

  Accounts receivable is a popular asset used in ABL, particularly for companies with substantial outstanding invoices. Lenders typically assess the quality and age of receivables to determine their liquidity and potential for collection. By using accounts receivable as security, businesses can unlock cash tied up in unpaid invoices as part of the ABL funding formula.

  Full Utilisation Of Company Assets To Raise Finance Via Asset Based Loans

  Furthermore, asset-based lending provides businesses with the opportunity to utilise their assets more effectively. For instance, a manufacturing firm can use its machinery or equipment as security to finance new projects or expand operations. This form of asset based loan facility is particularly beneficial for companies facing cyclical cash flow challenges, as it allows them to access funds without the constraints of traditional lending.

  We come across numerous SME companies who have either overdrafts and/or Invoice Finance facilities yet they are still looking for additional working capital to assist in growth or upcoming projects. When speaking to them it becomes clear that in some cases they have company assets that are not being fully used or valued by their existing providers.

  Asset Based Lending (ABL) provides just such a facility whereby a company's assets such as their Stock, Sales Invoices or Plant and Machinery are valued separately and, depending on the industry sector, can provide substantially more available funds than through say a traditional facility such as an Overdraft or Loan.

  Also see: Stock Financing

  ABL Providers & Their Criteria

  In the same way as Factoring companies are experts in handling sales invoices and providing maximum value out of such an asset, ABL providers have the same expertise to maximise value out of stock and plant/machinery. Clearly, not all businesses are suitable for this type of product but companies in sectors such as Timber, Pharmaceuticals, Printing, Packaging, Steel, Food and Automotive could do well by reviewing their existing facilities, especially if they are handled via the more traditional banking facilities.

  Also, company size will be key but if you have a turnover of £2-3m+ and stock (ideally finished goods) with a value of over £600k and plant and machinery worth a minimum of £50k then this could be for you. Here at FundInvoice, we know of ABL providers that may be able to help and would be happy to introduce you to them. J

  Advantages of Asset-Based Lending

  The advantages of asset-based lending include:

  Flexibility in Borrowing

  • Businesses can access substantial amounts of capital based on their assets.
  • Allows for the release of more funding than that against single asset classes alone.
  • Often allows for higher loan amounts compared to unsecured loans.
  • Especially beneficial for companies with significant stock holdings or plant, equipment and machinery.
  • Can be used for projects, general expansions, meeting operational costs or financing acquisitions.
  • Provides a financial cushion to navigate unforeseen challenges.
  • Can be offered by non-bank-owned independent institutions that may offer more flexible terms.

  Speed of Funding

  • The application process can be more streamlined than traditional loans.
  • Lenders focus on asset value rather than borrower’s creditworthiness.
  • Faster access to capital for urgent financial needs.

  Improved Financial Health

  • Utilises all existing assets.
  • Supports operational agility and quick adaptation to market changes.
  • Avoids the constraints of rigid financial commitments.

  Eligibility Criteria for Asset-Based Lending

  While asset-based lending offers greater flexibility than traditional lending, there are still specific eligibility criteria businesses must meet to qualify for asset based loans. One of the primary factors lenders consider is the quality and liquidity of the assets being pledged. High-quality assets with a proven track record are more likely to secure favourable loan terms. Lenders typically require businesses to provide documentation detailing their assets, including financial statements, inventory lists, and accounts receivable ageing reports.

  Additionally, lenders will evaluate the overall financial health of the business seeking financing. This includes assessing cash flow, profitability, and existing debt levels. While asset-based lending focuses on the assets as security, lenders want to ensure that the borrowing business can manage its obligations and maintain operational stability. A strong financial position can enhance a company's borrowing capacity and lead to more favourable ABL terms.

  The business's operational history and industry sector can also impact eligibility. Lenders may prefer to work with established companies that demonstrate stability and resilience within their respective industries. Startups or businesses in volatile sectors may face additional scrutiny, as lenders assess the risks associated with lending to such entities. Understanding these eligibility criteria can help businesses prepare for the application process and increase their chances of securing asset-based financing.

  If you are seeking ABL for a large company see our related article about: Large Company ABL Finance.

  Asset-Based Lending vs. Traditional Lending

  When comparing asset based lending to traditional lending, it’s essential to recognise the fundamental differences in how each approach evaluates creditworthiness and risk. Traditional lenders primarily rely on the borrower’s credit history, financial statements, and overall business performance to determine eligibility. This conventional method can often exclude businesses with less established credit profiles, making it challenging for them to access necessary funding.

  In contrast, asset-based lending places a stronger emphasis on the value of the assets being used as security. This means that even businesses with less-than-perfect credit can secure loans based on the strength of their assets. This shift in focus allows more companies to access capital, particularly those with significant tangible assets. Asset-based lenders may be more willing to overlook credit issues if the collateral provides sufficient security for the ABL finance.

  Additionally, the terms of ABL funding can differ significantly from traditional loans. ABL finance often comes with more flexible repayment options, allowing businesses to tailor terms to their cash flow needs. Interest rates may also vary, with asset-based loans sometimes carrying higher rates due to the perceived risk of lending against mixed asset classes. However, the ability to access larger sums of money quickly can outweigh the costs associated with these loans, making ABL an appealing option for many businesses.

  How to Apply for Asset-Based Lending

  Applying for asset-based lending typically involves several key steps: 

  1) Determine which assets can be leveraged for financing.

  • Gather necessary documentation (financial statements, stock lists, accounts receivable ageing reports).
  • Ensure a clear understanding of available assets to strengthen the case for financing.
  • Research and Identify Suitable Lenders. FundInvoice can help you with this, call 03330 113622 for options.

  2) Look for lenders specialising in asset-based financing.

  • Consider factors such as lender reputation, terms, financing rates, and industry experience.
  • Establish relationships with lenders familiar with the business sector for added advantage (again a broker can introduce you to suitable providers).
  • Submit a Strong Application.

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  3) Provide all required documentation along with a detailed business plan.

  • Outline fund usage, anticipated growth opportunities, and repayment strategies.
  • Demonstrate financial readiness and strategic planning to improve approval chances.

  Asset-Based Lending Process Explained

  The asset-based lending process typically unfolds in several stages, starting with the initial application and asset evaluation. Once a business submits its application, the lender will begin a thorough assessment of the security being offered. This assessment often includes a physical inspection of assets, stock appraisal, and financial reviews to determine the eligible loan amount. Lenders may also analyse historical performance data to gauge the business's ability to repay the ABL financing.

  Following the evaluation stage, the lender will present a financing proposal outlining the terms and conditions of the ABL financing. This proposal will include details such as the finance amount, fees and repayment schedule. Businesses should carefully review this proposal, as it is essential to understand the obligations involved and ensure that the terms align with their financial capabilities.

  Once both parties agree on the terms, the final step is to execute the ABL financing agreement. At this stage, businesses must provide the necessary security documentation to formalise the lender's claim on the assets. After all requirements are met, the lender will disburse the funds, allowing the business to utilise the capital for its intended purposes. Understanding this process can help businesses navigate the complexities of asset-based lending and ensure a smooth experience.

  Case Studies Showcasing Successful Asset-Based Lending

  To illustrate the effectiveness of asset-based lending, this article describes a series of case studies where we have used ABL-backed funding to help companies raise the amount of funding needed to support acquisitions: ABL Finance For Acquisitions.

  Common Misconceptions About Asset-Based Lending

  Despite its advantages, asset-based lending is often shrouded in misconceptions that can deter businesses from exploring this financing option. One common myth is that ABL is only suitable for distressed companies. While it’s true that businesses facing cash flow challenges can benefit from asset-based loans, healthy companies can also leverage their assets to fuel growth. Many successful businesses use ABL strategically to maintain liquidity and seize opportunities without overextending themselves financially.

  Another misconception is that asset-based lenders are overly aggressive and impose harsh terms on borrowers. While it's essential to recognise that lenders will evaluate the risks associated with the asset security pledged, many asset-based lenders aim to foster long-term relationships with their clients. They understand the importance of maintaining a healthy business environment and often offer flexible terms that accommodate the borrower's unique needs. Building a transparent relationship with lenders can lead to favourable outcomes for both parties.

  Lastly, some businesses believe that the application process for asset-based lending is overly complicated and time-consuming. While it does require thorough documentation and evaluation, many lenders have streamlined their processes to facilitate quicker approvals. With the right preparation and understanding of the requirements, businesses can navigate the application process efficiently.

  Conclusions: Key Takeaways on Unlocking Growth Through Asset-Based Lending

  In conclusion, asset-based lending presents a valuable opportunity for businesses seeking to unlock growth and enhance financial flexibility. By leveraging existing assets, companies can access capital that may not be available through traditional or single-asset financing channels.

  Understanding the nuances of ABL, including its benefits, eligibility criteria, and lending processes, equips businesses with the knowledge needed to make informed financial decisions.

  The advantages of asset-based lending, such as increased borrowing capacity, speed of funding, and improved financial health, make it an attractive option for a variety of businesses. By recognising the different types of assets that can be used as security and understanding how to effectively apply for and navigate the application process, companies can position themselves to gain approval.

  Finally, as evidenced by real-world case studies, asset-based lending can empower businesses across industries to achieve their goals and drive sustainable growth. By dispelling misconceptions and embracing the potential of ABL, companies can unlock new avenues for financial growth and operational success. As the business landscape continues to evolve, asset-based lending stands out as a dynamic tool that can help businesses thrive in an increasingly competitive environment.

  FAQ: What Is Asset-Based Lending?

  1. What is asset-based lending?

  Asset-based lending (ABL) is a type of business financing where a company uses its assets, such as accounts receivable, stock, equipment, plant & machinery, or property, as security to secure finance. It allows businesses to unlock funds tied up in assets, providing liquidity for growth or operational needs.

  2. How does asset-based lending work?

  The process involves a lender evaluating the value of a company’s assets to determine the loan amount. The business pledges these assets as security, and the lender provides a percentage of the asset value as finance. Regular audits and appraisals may be conducted to ensure the asset value is maintained.

  3. Who can benefit from asset-based lending?

  Asset-based lending is ideal for businesses that:

  • Have significant tangible assets, such as manufacturers, wholesalers, and distributors.
  • Face cash flow challenges or encounter substantial opportunities such as acquisitions.
  • Require quick access to capital but may not qualify for traditional loans due to limited credit history.

  4. What types of assets can be used as collateral in asset-based lending?

  The most common types of assets used in asset-based lending include:

  • Accounts receivable: Unpaid customer invoices.
  • Inventory: Stock of products or raw materials.
  • Plant and Machinery
  • Equipment
  • Commercial property owned by the business.

  5. What are the benefits of asset-based lending?

  Key benefits include:

  • Quick access to capital compared to traditional loans.
  • Flexible borrowing terms based on the value of assets.
  • Larger loan amounts for businesses with substantial assets.

  6. What are the risks of asset-based lending?

  Risks include:

  • Loss of pledged assets if the business defaults on the finance.
  • Potentially higher interest rates compared to traditional loans.
  • Regular audits and monitoring by lenders can be time-consuming.
  • Reduced flexibility if assets depreciate or lose value.

  7. How does asset-based lending compare to factoring?

  While both involve leveraging accounts receivable, asset-based lending uses a wider range of assets as security and typically offers lower interest rates. Factoring, on the other hand, involves selling receivables outright to a third party, often at a discount, for immediate cash.

  8. Is asset-based lending suitable for startups?

  Asset-based lending can be challenging for startups with limited or no assets to pledge as security. However, businesses with valuable intellectual property, equipment, or stock may still qualify for ABL. Other options may be better suited to financing startups.

  9. How quickly can I get funding through asset-based lending?

  The timeline for funding depends on the lender and the complexity of evaluating the assets. Many lenders can provide funds within a few weeks, but most will work to the customer's time related needs.

  10. How can I increase my chances of approval for asset-based lending?

  To improve your chances:

  • Maintain detailed and accurate financial records.
  • Ensure your assets are well-documented and valued.
  • Demonstrate a strong operational history and business plan.
  • Work with lenders experienced in your industry and use the services of a reputable broker.

  11. Are there alternatives to asset-based lending?

  Yes, alternatives include:

  • Invoice finance: Borrowing against unpaid invoices.
  • Traditional loans: Based on creditworthiness and financial history.

  12. Can I use intangible assets for asset-based lending?

  Some lenders accept intangible assets like intellectual property or patents, though this is less common. The asset must have a clear market value and liquidity to qualify for asset-based lending.

  By Sean Morrow