What is Asset-Based Lending?

July 8, 2022

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. 


How does an asset-based loan work?

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:

  • A small or medium-sized business applies for an asset-based loan through an alternative lender.
  • The business uses assets as securities against the loan – these could be equipment, stock and machinery, financial assets or intellectual property.
  • Finance providers offer immediate access to liquid capital with pre-agreed repayment terms.
  • Either:
    • The borrowing business meets the repayment terms on time and in full and the agreement ends with no long-term obligations, or…
    • The business defaults on the payments and the assets pledged in the agreement are seized by the lender.

For example:

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.


What are the benefits of asset-based lending?

There are many benefits of asset-based finance for businesses, including:

  • Many businesses are more likely to qualify for an asset-backed loan compared with a traditional loan because they can lean on assets to secure the loan. Traditional loans typically consider only the business’ credit history and turnover, which can cause many small and medium-sized businesses to be rejected.
  • Quick access to liquid capital for businesses experiencing cash flow challenges. The application process for asset-based finance with alternative lenders is typically much quicker and simpler than applying for loans through traditional lenders.
  • Flexibility, because businesses typically are not required to disclose what they intend to use the loan for. Asset-based finance can usually be used for any activity, allowing small and medium-sized businesses to fund growth.
  • Low-cost loan compared with alternative agreements, with only small repayment fees. This is because the business pledges assets as collateral, meaning that there is less risk to the lender.

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.


Am I eligible for asset-based lending?

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:

  • Financial history – while credit history is not as important in asset-based loan agreements as it is in traditional loans, lenders may still consider the business’ financial history as part of wider background checks during the application process.
  • The amount of finance required – the value of the borrowing business’ assets must be able to cover the loan amount, plus extra to compensate the lender for turning assets back into liquid capital.
  • The assets used as collateral to secure the loan – while many different assets can be pledged as security for the loan, the lender will consider both their value and how easily they can be turned into cash if necessary. For example, accounts receivable are easier to turn into liquid capital than product inventory or buildings.

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.

Accessing finance with Stenn

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

For more information on asset-based lending and how Stenn can boost business cash flow, contact our friendly team or get financed now.


About the Authors

Stenn is a registered member of the ITFA, IFA and WOA. It has financed invoices worth over $8 billion (USD) to date and provides:

  • An online platform for easy applications.
  • Non-recourse factoring (i.e. full protection against non-payment of invoices).
  • Rapid assessments (usually within 15 minutes).
  • Cash advances within 48 hours, with only two documents to sign.
  • Advances of between $10K (USD) to $10M (USD).
  • Fees that begin at 0.65%.
  • Advances on international deals that other companies and banks can’t, or won’t, finance.
  • Services in 74 countries.
  • Reverse factoring (buyers can use Stenn to pay immediately and settle the invoice later with us).

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.