Asset-Based Lending: How it Works & Getting Started

Asset-Based Lending

Asset-based lending is a type of financing that uses a company’s assets as collateral for a loan. Unlike traditional loans that focus on a company’s creditworthiness and cash flow, asset-based loans are secured by the company’s assets. This means that if the company is unable to repay the loan, the lender can seize and sell the assets to recoup their losses.

This form of lending provides an opportunity for companies to leverage their assets for growth without relying on their credit score. Asset-based loans are particularly beneficial for companies that may have strong balance sheets but weaker income statements, as lenders primarily focus on the value of the collateral. Additionally, asset-based lending can be tailored to the specific needs of a business, offering more flexibility than conventional bank loans.

Companies can use asset-based loans for a variety of purposes, such as funding growth, or stabilizing operations. Companies that have a high level of assets but may not have the credit history or cash flow to qualify for a traditional loan often use these loans. For startups and rapidly growing companies, asset-based lending can be an especially useful tool to fuel expansion without diluting equity.

Asset-Based Lending is a Form of Non-Bank Lending

Non-bank lending offers an alternative to traditional funding such as standard loans. Through non-bank lending, funding comes from different sources than traditional institutions like banks or credit unions. These sources allow for more innovative funding options, such as asset-based lending.

How Does Asset-Based Lending Work?

There are three main components to asset-based lending: the assets, the advance rate, and the borrowing base.


The assets used as collateral in an asset-based loan can vary, but they typically include accounts receivable, inventory, and equipment. These assets are typically liquid, meaning they can be easily converted into cash. Lenders will often appraise these assets to determine their current market value, which will impact the company’s borrowing capacity.

In some cases, real estate or intellectual property may also be considered as part of the collateral pool. The inclusion of these types of assets can increase the complexity of the lending agreement but may also increase the amount a business can borrow.

Advance Rate

The advance rate is the percentage of the asset’s value that the lender is willing to lend against. For example, if a company has $500,000 in accounts receivable and the lender has an advance rate of 80%, they would lend the company $400,000. The advance rate is determined by the liquidity and risk associated with the assets; more liquid assets like accounts receivable will typically have higher advance rates than less liquid assets like inventory.

The advance rate will also take into account the historical performance of the assets. For example, if the accounts receivable have a high rate of collection, the lender may be more willing to offer a higher advance rate.

Borrowing Base

The borrowing base is the total amount that a company can borrow based on the value of its assets. It is calculated by multiplying the advance rate by the value of each asset. For example, if a company has $500,000 in accounts receivable and $200,000 in inventory, and the advance rates are 80% and 50%, respectively, the borrowing base would be $400,000 for accounts receivable and $100,000 for inventory, for a total of $500,000.

The borrowing base is not static and can fluctuate based on changes in the value of the underlying assets. This dynamic nature requires companies to regularly report the status of their assets to the lender, often through monthly borrowing base certificates.

Benefits of Asset-Based Lending

Asset-based lending offers several benefits for businesses, including:

  • Quick access to capital: Asset-based loans are typically processed faster than traditional loans, allowing businesses to access funds quickly for their needs. This can be critical for companies that require immediate funding to capitalize on time-sensitive opportunities or cover unexpected expenses.
  • Less stringent requirements: Asset-based loans are secured by assets, so lenders are less concerned with a company’s credit history or cash flow. This makes it easier for businesses to qualify for this type of financing, particularly for those with limited operating history or those recovering from financial setbacks.
  • Flexibility: Asset-based loans can be used for a variety of purposes, giving businesses the flexibility to use the funds in ways that will benefit their growth and success. Whether it’s for purchasing inventory, expanding operations, or funding acquisitions, the capital can be allocated as the business sees fit.
  • Lower interest rates: Asset-based loans often have lower interest rates compared to other forms of alternative financing, making it a cost-effective option for businesses. This is largely due to the secured nature of the loan, which reduces the lender’s risk.

Additionally, asset-based lending can improve a company’s liquidity without significantly impacting the balance sheet. By not diluting ownership like equity financing does, business owners maintain control while gaining the capital needed for growth.

Getting Started with Asset-Based Lending

If you’re considering asset-based lending for your business, here’s what you need to know to get started:

Understand Your Assets and Their Value

Before applying for an asset-based loan, it’s important to understand your assets and their value. This will help you determine the potential borrowing base and how much capital you can access through asset-based lending. Accurate valuations of your assets will ensure that you can maximize your borrowing capacity while maintaining realistic expectations about the loan terms.

Get an Appraisal

An external appraisal of your assets may be beneficial to provide an objective assessment of their worth. This step can also prepare you for the lender’s own valuation process and help expedite the loan application.

Find a Lender

The next step is to find a lender that offers asset-based lending. It’s important to research and compare different lenders to find the best fit for your business needs. Consider factors such as interest rates, advance rates, and any additional fees or requirements. Look for lenders with experience in your industry, as they may be more understanding of your business model and asset valuation.

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Reputable lenders will have a track record of successful asset-based lending transactions and should be able to provide references or case studies. Don’t hesitate to ask for this information as part of your due diligence.

Prepare Your Financial Documents

Lenders will require financial documents, such as balance sheets, income statements, and tax returns, to assess your company’s financial health and determine the amount they are willing to lend. It’s important to have these documents ready and up-to-date before applying for an asset-based loan. Organized and transparent financial records will facilitate a smoother lending process and can lead to more favorable loan terms.

In addition to historical financials, prepare a detailed business plan that outlines how the loan will be used and how it fits into your company’s growth strategy. This can give lenders confidence in your ability to manage the loan and achieve your business objectives.

Create a Borrowing Base Certificate

A borrowing base certificate is a document that lists all the assets that will be used as collateral for the loan, along with their current value. It’s important to create an accurate and detailed borrowing base certificate, as it will be used to determine the borrowing base for your loan. Regular updates to this certificate may be required by the underwriter or lender to reflect changes in the value of the collateral.

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The borrowing base certificate should be prepared with diligence to ensure it accurately reflects the current status of your assets. Errors or omissions can lead to a reduction in the available credit or even a default under the terms of the loan agreement.

Understand the Terms and Conditions

Before signing a loan agreement, it’s important to thoroughly understand the terms and conditions of the loan. This includes interest rates, repayment schedule, and any additional fees or requirements. Make sure to clarify any questions or concerns with the lender before proceeding.

Be aware of any covenants or restrictions that may be included in the loan agreement, such as financial ratios you must maintain or limitations on additional borrowing. Understanding these details upfront will help you manage the loan effectively and avoid potential pitfalls.


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