Asset-based lending – also known as asset-based finance – refers to a financial agreement in which a business borrows money against collateral such as inventory, machinery or equipment, or against financial assets like accounts receivable.
It is a business loan agreement typically designed to support small and medium-sized businesses that may not have the necessary cash flow or credit history to secure a traditional loan. These businesses can use their assets as a security to qualify for cash loans with alternative lenders.
The assets referenced in the loan name are often financial securities that can be easily turned into liquid cash, such as accounts receivable. However, assets can also be physical, such as buildings or product stock.
The amount of finance provided is often lower than the value of the asset pledged, to cover the lender against the time and effort of turning it into cash if the borrower defaults on payments.
Small and medium-sized businesses often experience challenges with cash flow and liquidity. However, these businesses still need access to capital to cover their own accounts payable, such as paying manufacturers and logistics costs.
Many of these businesses fail to qualify for cash loans through traditional lenders due to having a short or poor credit history. So, they may turn to alternative lenders and agreements like asset-based lending.
This allows businesses to use assets – rather than credit history alone – to qualify for finance. If the business is unable to pay, the lender will seize control of the assets.
A typical asset-based finance agreement works in the following way:
ABC Supplier Ltd. needs access to short-term funding of £10,000, as it is currently working with delayed invoice payment terms up to 120-days with overseas customers and needs to pay its own suppliers.
So, ABC Supplier Ltd applies for asset-based lending with a finance provider. The provider agrees to finance 90% of the desired amount – valued at £9,000 – by securing the loan against ABC Supplier Ltd’s assets.
The loan is secured against ABC Supplier Ltd’s accounts receivable, worth £10,000 – with the understanding that if it doesn’t meet the repayment terms, the lender will take ownership of those financial assets.
ABC Supplier Ltd receives timely payment from its overseas customers and pays its lender back in full and on time. The loan agreement ends and there are no long-term obligations or repayment terms.
There are many benefits of asset-based finance for businesses, including:
However, it is important to consider the potential risks of asset-based lending before entering into an agreement. These include the obvious risk of losing valuable assets if the business defaults on repayments, as well as negatively impacting its credit scores - which may mean that it is unable to qualify for finance in the future.
Some asset-based lending agreements carry fewer risks than others, though. For example, borrowing against accounts receivable (also known as invoice factoring) means businesses are effectively taking advances against issued invoices – so they are only accessing finance that is already owed to them.
Businesses are more likely to qualify for asset-based lending compared with traditional loans, as assets are used as security, so there is less risk to the lender. However, a business’ eligibility for asset-based lending will depend on the lender.
Common criteria that lenders may look for include:
Alternatively, businesses may be eligible for fast and easy ‘invoice financing’, in which finance providers buy a business’ unpaid invoice(s) in exchange for immediate cash.
Stenn’s invoice financing offers access to liquid capital for small and medium-sized businesses that engage in international trade. Exporters can use their unpaid invoices to access immediate capital.
Our process is completely online and requires only two documents to be signed. Approved funds are transferred within 48 hours of a successful application. Apply for finance with Stenn now.
“We are very much happy with the Stenn service. Everything is fast, and everything is dealt with in a professional and proactive manner.”
Ramji Lal – Oren Hydrocarbons
Stenn is a registered member of the ITFA, IFA and WOA. It has financed invoices worth over $8 billion (USD) to date and provides:
This article is authored by the Stenn research team and is part of our educational series.
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Disclaimer: The above article has been prepared on the basis of Stenn’s understanding of current invoice factoring. It is for information only and doesn’t constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.