Business Loans

What is Asset-Based Lending?

May 02, 2024 • 9 min read
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      Asset-based lending, also known as asset-based financing, is a type of business loan or line of credit that companies secure with collateral. With traditional loans, lenders often emphasize a company’s creditworthiness and cash flow when determining whether to approve applications for business funding. Yet with asset-based lending, the value of the collateral that backs the financing plays a more meaningful role in your business’s ability to get funded and its borrowing capacity. 

      How does asset-based lending work?

      In asset-based lending, a business secures a loan or line of credit by offering its assets as collateral. These assets can include real estate, inventory, accounts receivable, equipment, and other property that holds value. The lending agreement specifies how much money the business can borrow, which is usually a percentage of the collateral’s appraised value. This percentage varies depending on the type of asset and its marketability; for instance, receivables might be financed at around 70% to 80% of their value, while inventory may only secure around 50%.

      The process begins with the lender evaluating the assets to determine their current market value. If the business defaults on the loan, the lender has the right to seize the collateral, sell it, and recover the owed amount. This makes asset-based loans less risky for the lender compared to unsecured financing, potentially leading to more favorable interest rates for the borrower. However, businesses must consider the risk of losing their assets before entering into such agreements.

      How much can you borrow? 

      Depending on the lender you work with and other factors, your business might be able to borrow up to 80% of the face value of its accounts receivable. When taking out an equipment loan to purchase equipment, eligible borrowers may be able to secure up to 100% financing. However, if your goal is to use equipment your business already owns as collateral for an asset-based loan, some lenders may be willing to extend only up to 50% of the equipment’s value (depending on the type of equipment, its condition, projected depreciation, and other details).

      Pros and cons of asset-based financing.

      If you’re considering applying for an asset-based loan to secure additional capital for your business, it’s important to evaluate the pros and cons associated with this type of financing. 

      Pros of asset-based financing.

      • Qualification requirements: Perhaps the biggest appeal of asset-based financing is the fact that these loans and lines of credit tend to be easier to obtain, compared with traditional business funding options. Cash flow challenges, limited time in business, and even poor personal and business credit scores may not be deal-breakers with this type of financing, depending on the lender. 
      • Fast funding: Certain types of asset-based lending may feature faster funding speeds compared with traditional business loans (especially SBA loans). Accounts receivable loans, for example, could provide eligible borrowers with access to capital in as little as 24 hours.
      • Less personal risk: With traditional business loans, the business owner often has to sign a personal guarantee to secure funding. Asset-based financing, however, may not feature this requirement (though it’s important to verify the details before signing any financing agreement). 

      Cons of asset-based financing.

      • Higher costs: It’s common for asset-based financing to feature higher interest rates and fees compared with traditional business loans or lines of credit. In some cases, the cost difference could be significant. 
      • Some assets may not qualify: Your asset will need to satisfy a lender’s criteria to qualify as collateral for an asset-based loan or line of credit. In general, acceptable assets are high value, have a low depreciation rate, and are easily converted to cash.
      • Loss of asset(s): If your business defaults on its debt, you risk losing the asset(s) it pledged as collateral.

      Asset-based lending vs. cash-flow lending.

      When comparing asset-based lending to cash-flow lending, it’s essential to understand the primary differences between these financing options. Asset-based lending focuses on the value of the collateral that a business can provide, such as inventory, equipment, or accounts receivable. This type of financing is particularly beneficial for companies that have significant physical assets but might not have a strong cash flow.

      On the other hand, cash flow lending evaluates a business’s future cash flows as the main criteria for the loan. Lenders look at the company’s past and projected cash flow statements to assess its ability to repay the loan. This type of lending is more suitable for businesses with strong and predictable cash flows but fewer physical assets to use as collateral.

      The choice between asset-based lending and cash-flow lending depends on the specific needs and circumstances of the business. If a company has valuable assets but faces cash flow challenges, asset-based lending may offer a viable solution. Conversely, for businesses with strong cash flows but limited assets, cash-flow lending might provide a more appropriate form of financing. Both options have their merits and potential drawbacks, necessitating a careful analysis to determine the best fit for the business’s financial strategy.

      Is asset-based lending right for my business?

      Asset-based financing can come in many different shapes and sizes. Therefore, the best way to determine whether a financing solution makes sense for your business is to research and ask questions before you apply for any new loan, line of credit, or cash advance. 

      First, you should make sure your business can afford to borrow additional money. If you’re confident you can manage the new indebtedness and the repayment schedule that involves, you should then assess the risks, benefits, and costs. Finally, take the time to shop around and compare business financing options. Interested in asset-based lending and how your business might benefit from this type of financing solution? Learn more about accounts receivable financing here.


      Qualifying for asset-based lending primarily depends on the quality and value of the collateral your business can provide. Lenders will assess the value of the assets you propose to use as collateral, such as accounts receivable, inventory, real estate, or equipment, to determine if they meet the criteria for an asset-based loan. In addition to collateral, lenders may also consider your company’s credit history, although less emphasis is placed on credit scores compared to traditional loans.

      The financial health of your business, demonstrated through cash flow and profitability, may also be evaluated to ensure your business can support the repayments. Lastly, having a clear and accurate record of your assets, including valuation certificates or financial statements, can facilitate the qualification process.

      Imagine a manufacturing company leverages $140,000 worth of its inventory as collateral to secure a loan. Through asset-based lending, the company obtains a loan of $70,000 (50% of the value of its inventory) by offering its existing inventory of raw materials and finished goods as security. This influx of funds enables the company to purchase the additional raw materials needed, cover labor costs for increased production, and ultimately fulfill the contract.

      If, however, the company uses its accounts receivable as collateral, it can secure up to around 80% (or $112,000) of the value of its marketable securities.

      Obtaining financing through asset-based lending can be comparatively easier for businesses that might not qualify for traditional loans due to cash flow issues, a short time in operation, or less-than-perfect credit scores. The ease of access primarily hinges on the value and quality of the collateral you can provide. If your business owns assets that are high in value, easily liquidated, and meet the lender’s criteria, you have a strong chance of securing asset-based financing. Keep in mind, though, that each lender has its own set of requirements, and the process might involve detailed assessments of your assets. Therefore, while asset-based lending can offer a viable route to financing, the ease of obtaining such loans depends significantly on your company’s specific financial and asset situation.

      Asset-based lending and hard money loans both provide financing based on collateral, but there are distinct differences between the two. Asset-based lending typically focuses on the value of assets such as inventory, accounts receivable, and equipment. It is often used by businesses seeking working capital or to finance growth. The terms and interest rates for asset-based loans are generally determined by the quality of the collateral and the financial health of the business.

      Hard money loans, on the other hand, are often associated with real estate transactions and are primarily used for property purchase or development. These loans are usually provided by private investors or companies rather than banks, with the loan amount based on the property’s value rather than the borrower’s creditworthiness. Hard money loans tend to have higher interest rates and shorter repayment terms compared to asset-based lending, reflecting the higher risk taken by the lender. The key distinction lies in the purpose and collateral for the loan, with hard money loans being more specialized towards real estate ventures.

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      About the author
      Michelle Lambright Black

      Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. Founder of—an online community that helps busy moms take control of their credit and finances—Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many more.

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