Asset-based lending - also known as asset-based finance - refers to an agreement under which a company borrows money against collateral.
This collateral can include physical assets such as stock, equipment, machinery or property, or non-physical assets such as intellectual property or accounts receivable (unpaid invoices).
What to Consider with Asset-Based Finance
Asset-based loans are often used to cover short-term expenses and fund growth within a company. Many SMEs have cash flow and liquidity problems and need working capital to cover business expenses.
Using assets as security to qualify for asset-based loans is an attractive option for many small- and medium-sized enterprises (SMEs) that might not have the credit history or facilities to secure a traditional bank loan.
However, lenders will need to ensure that they are covered should the applicant default on payment. As a result, the lender may offer a loan amount that is lower than the value of the pledged assets so as to protect itself if the borrower does not pay back the loan.
Many SMEs fail to qualify for unsecured loans due to having a limited or poor credit history. If a company seeking a loan cannot present sufficient cash flow as evidence of its ability to repay it, the lender may prefer to approve the loan using company assets as collateral.
Asset-based loan amounts depend on the type and value of assets that are secured as collateral. Some lenders might prefer physical assets that can be easily converted into cash if the borrower defaults on payment.
The lender will take ownership of the assets if the applicant does not pay.
A typical asset-based finance agreement works in the following way:
ABC Supplier Ltd needs access to short-term funding of £10 000 (GBP) to pay its manufacturing costs, as it is currently offering invoice payment terms of up to 120 days to its overseas Buyers.
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 (GBP) – by securing the loan against ABC Supplier Ltd’s assets.
The loan is secured against ABC Supplier Ltd’s equipment, worth £10 000 (GBP) – with the understanding that if it doesn’t meet the repayment terms the lender will take ownership of that equipment.
ABC Supplier Ltd receives timely payment from its overseas customers and pays back the lender 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 lending, including the following:
There are risks associated with asset-based finance. These include the following:
Therefore, it’s crucial to consider all the pros and cons of taking out an asset-based loan.
Some asset-based lending agreements carry fewer risks than others. For example, borrowing against unpaid invoices - commonly known as invoice financing or invoice factoring - means that companies access finance only on funds already owed to them. For more information about how invoice finance works, refer to this guide.
A lender will look for the following information to determine whether a company is suitable for asset-based loans:
If you are interested in learning more about the content listed above, Stenn has a dedicated FAQ section where you can find more information about our invoice financing services. We also provide videos which explain the company and the financing process in detail.
About the Authors
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
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Disclaimer: The above article has been prepared on the basis of Stenn’s understanding of the subject. 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.