Asset-based financing – also called asset-based lending (ABL) – is a type of business financing backed by anything your business owns that has cash value or, in other words, its assets. This means that if your business can’t pay back the loan, your lender can take and sell these assets to make up for the loss. Typically, business owners use asset-based lending for working capital or to fund new projects.
Asset-based loans are riskier for the borrower — your business stands to lose big if it folds. But if you’ve had trouble qualifying for traditional loans in the past, you may have an easier time getting access to funds with this type of financing.
While it’s possible to get an asset-based term loan, business lines of credit tend to be more common.
How does asset-based financing work?
Asset-based lending works a lot like a secured business loan or line of credit. How much you’re eligible to borrow — called the borrowing base or loan-to-value (LTV) ratio — depends on the value of your assets. Typically, your business can borrow between 75% and 85% of the total value of your assets.
Your borrowing base often depends on the type of asset you’re using. For example, the LTV for loans backed by equipment or inventory can be 50% or lower since their values can decrease over time. Meanwhile, accounts receivables can get you an LTV as high as 90% because they’re fixed values that won’t change. With an asset-based line of credit, your lender regularly re-evaluates the value of your assets to adjust your borrowing base.
Let’s look at an example: Say a business owns $10,000 of equipment and applied for an asset-based line of credit.
It originally qualified for a credit limit of $5,000, a 50% LTV. But after the value of the equipment depreciated to $8,000, it could only qualify for a $4,000 credit limit with a loan backed by those assets alone.
What types of assets can my business use to back a loan?
Almost anything your business owns that has a cash value. Some common assets include but aren’t limited to:
Inventory
Accounts receivables
Equipment
Machinery
Real estate
Vehicles
How much does it cost?
Asset-based loans can be less expensive than your average term loan. Typically, the APRs on asset-based loans range from 7% to 17% — though they’ll vary depending on your specific situation.
On top of interest, you might have to pay to have your assets evaluated. How much you’ll fork over for an appraisal depends on the type of asset. Accounts receivables are typically easiest to assess, while inventory, machinery and real estate might require a site visit.
Can my business qualify for asset-based financing?
Whether or not your business qualifies for an asset-based loan generally depends on your business’s assets more than anything else. Typically, your assets must:
Not be used as collateral for another loan. If your assets are already being used as collateral, then you’ll need to get your lender to agree to take the collateral off the loan.
Not be tied up in any accounting, tax or legal issues. This includes tax liens and lawsuits that could affect your business’s ownership of the assets.
Meet the lender’s minimum borrowing requirements. Typically, lenders require businesses to have assets with a borrowing base of at least $700,000. This means that between 75% and 85% of your assets’ value must be at least $700,000.
How to apply
One of the drawbacks of asset-based lending is that the application process is much more involved than your standard online loan. There are a few reasons for that. Asset-based lines of credit typically involve long-term relationships between the lender and the business, so lenders often want to make sure that they’re dealing with a trusted partner. Also, getting an accurate evaluation of your business assets’ worth can take some time and work.
Typically, you’ll follow these steps:
First, get an idea of where your business stands financially to help you decide if an asset-based loan is the right for your business. Start by taking a look at the most up-to-date versions of the following documents — your lender will likely ask to see them anyway.
Balance sheets. This is where you’ll get a preliminary idea of what your business’s assets are and if they have enough value to qualify for a loan.
Income statements (also known as profit-and-loss, or P&L, statements). A year-to-date profit and loss statement gives you an idea of your business’s current cash flow, and your previous year’s annual P&L statement helps you determine seasonal trends.
Tax returns. Look at the past three years of your business’s tax returns to grasp how your business handles revenue. If your company is relatively young, include your personal tax returns.
Business bank statements. Business bank statements are one of the most common ways for lenders to assess day-to-day profits and losses. Review at least four months of your business bank statements — or a year if you have seasonal sales.
Sales forecast. Asset-based lenders often give as much weight to your business’s future sales as its sales history — if not more. Have a firm grasp of where your business is heading before you start looking for an asset-based loan.
After reviewing your business’s balance sheets, identify the assets that your business could use as collateral and take a closer look at what you’re working with. Start by reviewing some or all of the following documents.
Accounts receivables aging statement. Accounts receivables are the most common type of collateral used for an asset-based loan. An aging statement shows the value of your invoices, when they’re due and any overdue stragglers.
List of equipment. If you don’t have an updated list of your company’s equipment, make one. Includes in-store fixtures and appliances — like your cash register — as well as heavy machinery and vehicles. For each item, list the price you bought it for, whether you got it used or new, how old it is, where it’s located and its condition. Bonus points if you can estimate its current value by looking into depreciation values or getting it appraised — you can do this online for free with vehicles and some other items.
List of inventory. Review or create an up-to-date list of your business’s inventory and its estimated value for resale — the amount your lender could sell it for, not the retail value. Also make a note of where it’s stored.
Now that you know what assets you can use to back your loan, make sure that they aren’t tied up in anything else. If your business is facing a lawsuit that could affect its assets, hold off on applying until after the suit is over. And settle any unpaid taxes if your business has a tax lien on its assets.
While you might be able to qualify for an asset-based loan even if you’re using some of your assets as collateral for another loan, you’ll likely have a better chance of getting approved if you close those debts first.
Once you have an idea of what you’re working with, start comparing lenders that offer asset-based financing. Ask yourself the following questions to make sure you find the right loan for your business:
Is my business eligible? This typically falls on the value of your business’s assets. If the lender doesn’t mention a borrowing base minimum online, call and ask if it has one.
What are the rates? Since asset-based loans are less risky for the lender than unsecured loans, you can typically find lower rates between 7% and 17% APR. Comparing APRs on lines of credit is the easiest way to tell which will cost your business less in the long run. If you’re comparing loans, make sure they have similar terms.
Once you’ve found a lender that works for your business, complete and submit the application. Many allow you to do this online, though some banks and credit unions might ask you to visit them in person.
You might be required to submit a few preliminary documents, like bank statements, along with your application. Some lenders could require a financial audit by a third party. Reach out to your lender if any part of the application is unclear.
It can take up to a month for your lender to review your application.
The due diligence process convinces your lender that your assets are worth what you say. Here, your lender calculates your business assets’ value, checks that they aren’t being used as collateral for anything else and inspects your accounting book.
This typically includes a field audit, where a lender representative visits your business to check out your office space, review your account receivables and financials and inspect any equipment or machinery offered for collateral. Since asset-based loans are typically long-term financial commitments, your lender typically uses this visit to determine if the two of you can sustain a long-term relationship.
Generally, you’ll have an idea if you’re approved by the end of the field audit. But you won’t know for sure until your lender fully assesses your assets and application and gives you a final offer.
Review, sign and submit your loan documents once you get the green light from your lender and wait for your business to receive its funds.
Pros and cons of asset-based financing
Pros
It’s easier to be approved for these type of financing agreements. As your loan is secured against the assets borrowed, it’s often possible to be approved without a great business credit score.
Upgrade your equipment. Investing in equipment allows you to operate at higher capacity and bring in more revenue.
You may be able to lease equipment. Some lenders may allow you to lease equipment and buy it after the lease expires. Plus, with some leasing deals, the lender is responsible for maintaining the equipment.
Reinvest in other aspects of your business. With a loan to cover the cost of equipment, you can use your business’s cashflow to reinvest in other needs such as hiring and training, marketing or increasing your inventory.
Seasonality doesn’t matter. Manufacturers, distributors and other businesses that have seasonal drops in cash flow could particularly benefit from asset-based lending.
Timely repayments will boost your credit score. This will make it easier to access other credit products for your business like commercial real estate financing, business credit cards and other loans.
Cons
More fees than other types of financing. You’ll likely need to cover the cost of the due diligence process, which can get pricey depending on how long it takes.
Not for new businesses. It’s easier for established businesses to meet the minimum borrowing requirements and show its business financials are strong enough to qualify for a loan.
Potentially costly. It’s more expensive to finance an asset than buy it outright.
Risk losing your assets. Your assets will be repossessed if you fall behind on repayments.
May require a deposit upfront.
How is asset-based financing different from a secured business loan?
While asset-based lending and secured business loans are similar, they differ by how lenders determine your loan amount. Asset-based lending determines loan amounts based on the value of what your business owns, such as accounts receivables or real estate.
Secured business loans are typically backed by one specific asset like a piece of equipment or vehicle stated in the terms. Often, businesses use the funds from a secured business loan to purchase the asset it’s using as collateral. For example, if a restaurant took out an equipment loan to buy an industrial dough mixer, it’d use the dough mixer as collateral for the loan.
Asset-based financing vs. factoring
The fundamental difference between asset-based lending and factoring is how it works. With asset-based financing, your business takes out a loan based on the value of items it owns. With factoring, your business sells one of its assets — its unpaid invoices — to a third party.
With asset-based financing, you pay off your loan plus interest and fees in regular installments over a set period of time. Factoring is typically a two-part deal: You get part of the funds upfront and the remaining value of your invoices after your clients pay up — less a fee.
Asset-based financing is generally a better option for more established businesses. Many asset-based loans start with a borrowing base of around $700,000, while factoring typically has a much lower minimum — if any at all.
Bottom line
Asset-based loans could be a good long-term financing solution for established businesses that have trouble qualifying for unsecured business loans due to gaps in cash flow or bad credit. It’s not great when you need quick or small-dollar funding, and you could have trouble qualifying if your business is just getting off the ground.
Interested in learning more about your business loan options? Visit our guide to compare lenders and find out how different types of financing work.
Frequently asked questions
The amount you can borrow depends primarily on the value of the assets you’re putting up as collateral versus the amount you want to borrow – this is known as a loan-to-value ratio (LVR). A loan based on accounts receivables (such as unpaid invoices from clients or customers) will often come with an LVR of up to 90%, while assets in the form of stock and equipment might mean a loan of approximately half their worth.
Typically, asset-based loans are designed to meet short-term financial needs. Though options may vary between lenders, you’re generally looking at loan terms of 12 months or less.
Many asset-based loans offer more flexibility in their repayment plans than traditional loans. You will often be able to choose how long you make repayments for and contribute single lump sum payments at the end of the loan period. This can reduce monthly expenses and the interest you pay.
Not for a business that’s paying it back. In this case, it’s considered a liability. Loans are only assets for the lender, since it’s money it stands to collect.
No. You can’t get asset-based loans from the BDC, although your businesses’s assets may be considered along with other aspects of your business including the type of project you want financed, your operational cash flow and how it’s managed.
Yes. In fact, an asset-based line of credit can help your business cover working capital costs while its funds are tied up in the transition. And once the merger is complete, you can use your business’s new assets to increase the credit limit.
Yes. Some lenders specifically offer asset-based lending options for healthcare companies and hospitals.
Anna Serio is a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY.
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