What Is Asset-Based Lending?
Asset-based lending is any type of financing that’s secured by tangible assets—including a business’s accounts receivable, inventory, machinery, or other forms of collateral. Typically, businesses can borrow 75% to 85% of the value of their accounts receivables or around 50% of the value of their inventory or equipment.
Compared to other small business loans, asset-based lending is easier to qualify for—as the tangible collateral mitigates risk for the lender. In the case of default, your asset-based lender can recoup their losses by seizing and selling the collateral.
Is asset-based lending right for your business? Use our guide to find out.
In This Guide
How Does Asset-Based Lending Work?
There are generally two types of asset-based lending: traditional business term loans or business lines of credit. In either case, an asset-based lender, typically an online lender, offers you an advance of capital based on the market value of your secured assets.
Desirable assets are those that can be quickly and easily liquidated. You can usually borrow between 75% to 85% of the value of your accounts receivables and around 50% of the value of your inventory or equipment.
If your asset-based lending is a term loan, you’ll pay back the advance, plus interest, over a designated period of time. On the other hand, if it’s an asset-based line of credit, you’ll be able to draw on the credit line as needed, and only pay interest on the funds you’ve used.
In either case, your assets are used to secure the financing—and in the case of default, your lender will be able to claim the assets and sell them to cover their losses. Many businesses seek asset-based lending to cover working capital and cash flow needs, especially when they can’t otherwise qualify for financing.
Asset-Based Lending Rates
Due to the differences in financing products, lenders, and business qualifications, the interest rates for asset-based lending can vary widely—ranging anywhere from 7% to 30%.
Overall, you’ll generally find that interest rates are higher than what you’ll find with bank products since most asset-based lenders are alternative lenders. However, you’ll typically see lower rates compared to unsecured business loans because your tangible assets mitigate the risk for the lender.
Asset-Based Lending Terms
Similar to interest rates, there’s no real consistency amongst asset-based lending terms. In fact, the terms associated with this type of financing vary largely based on the type of collateral that’s used to secure the loan.
As an example, if accounts receivable is used to secure the loan, the terms are usually very short—based on the payment terms of the outstanding invoices. With machinery or equipment, on the other hand, the terms may be much longer—five or six years, up to the projected life of the piece of equipment.
Asset-Based Lending Examples
There are a variety of types of collateral that can be used for asset-based lending. Here are some of the most common examples of asset-based loans, depending on the type of collateral your business has:
If you’re a service-based business that invoices customers, any receivables due within 30 to 90 days can be eligible as collateral for an asset-based loan. In this case, the size of the loan your business qualifies for is proportional to your outstanding receivables—the more you’re invoicing, and the greater the value of your invoices, the more you’d be able to borrow.
It’s important to note that an asset-based loan that uses invoices as collateral—in other words, invoice financing—is different from invoice factoring. When working with a factoring company, the lender purchases your outstanding invoices outright in exchange for a flat sum, then collects your customers’ payments for you.
Once they collect the full amount of your accounts receivables, they’ll pay you the difference, but keep a percentage for their services. So, where an asset-based loan using accounts receivables is a true loan, invoice factoring is actually a sale.
Use our guide to learn more about accounts receivable financing.
If you operate a manufacturing, wholesale, or retail business, chances are you have a stockpile of inventory.
In this case, inventory can serve as collateral for asset-based lending—an asset-based lender appraises inventory that you have to determine its resale value, and that value can be used to secure your loan.
Then, you can take out your loan and use your inventory as needed. If, however, you fail to make payments or default on your loan, your asset-based lender would have the right to repossess that inventory (or other inventory of similar value) as repayment for your debt.
Machinery or Equipment
Manufacturing equipment, vehicles, commercial kitchen appliances, computer systems—almost any machinery or equipment that your business owns—can be eligible collateral for an asset-based loan, like an equipment loan or business auto loan.
Generally speaking, the higher the value of your business’s owned fixtures, the more funds you’d be eligible to borrow. But remember: You need to own your equipment outright for it to be eligible as collateral in an asset-backed loan. More specifically, your business needs to own that equipment, not you personally.
In certain cases, any real estate that a business holds—like owned retail or manufacturing space, land owned by a development company, or other real estate property—can be considered a fixed asset eligible for asset-based lending. Usually, though, these situations are tricky and need to be evaluated on a case-by-case basis.
If you’re interested in using real estate holdings to secure an asset-based loan, you’ll first need to get an independent appraisal to determine the property’s market value and any appreciations.
Additionally, you’ll want to keep in mind that if you’re paying a mortgage on the property, you’ll need to have paid off a significant portion in order to use that property as collateral for your business loan.
Asset-based lenders can only consider the real equity component of your real estate holdings—that is, those portions that you’ve paid off and own outright. The mortgaged value of your property can’t be used as collateral, since your mortgage provider already has first rights to that property value in the event of a business failure or default.
Advantages of Asset-Based Lending
Now that you have a sense of the most common types of asset-based lending and how it works, you might be wondering why you would opt for this type of financing. After all, to access one of these loans, you’re putting a significant amount of your business’s assets on the line.
Many borrowers turn to asset-based lending because they’ve had difficulty getting approved for financing from traditional lenders. Therefore, you might find that an asset-backed loan is well-suited for your business’s needs.
With this in mind, let’s review some of the reasons why you would use asset-based lending:
Of course, asset-based lending has its disadvantages as well. Perhaps the biggest disadvantage is that, although there’s nothing to say you won’t be able to find an affordable asset-based loan, it’s very likely that a bank or SBA loan will have lower interest rates—for those who can qualify.
Similarly, it’s also worth noting that an asset-based loan is limited by the value of your assets. If you’re looking for a large amount of financing but don’t have assets equal to that amount, you’re going to have trouble qualifying for the capital you need.
Top Asset-Based Lenders
If you think asset-based lending is the right route for financing your business, you’ll want to explore some of the best asset-based lenders. Here are a few top options to consider:
InterNex Capital is an online lender that provides business lines of credit that are secured by a borrower’s accounts receivable. With InterNex, you can use your accounts receivable to secure a loan between $250,000 and $10 million with a maximum 12-month term and annual interest rates under 18%.
To qualify for an InterNex line of credit, you’ll need a minimum annual revenue of $1 million and at least two years in business. InterNex does not have a minimum credit score requirement.
You can apply for an asset-based line of credit on their website in just minutes and receive funding in as little as four to seven business days.
Another top asset-based lender is altLINE.
altLINE offers invoice factoring—in which they purchase your outstanding accounts receivables, as well as accounts receivable financing—where they advance you a percentage of the value of your invoice’s value, which you’ll repay, plus interest.
In addition, they also offer a separate asset-based lending program in which you can access a revolving line of credit collateralized by your accounts receivables.
Amounts, rates, terms, and qualifications vary based on each individual product, but business owners should have at least a 500 personal credit score.
To apply for asset-based lending from altLINE, you can fill out an initial application and work with their team to continue the underwriting process. Generally, you can expect to fund in a few days.
Finally, you might look into Balboa Capital for asset-based lending. Their most popular product is equipment financing, which follows a lease and buy-back structure and provides a corporation-only guarantee option for business owners hesitant to provide a personal guarantee.
To qualify, you’ll need an annual revenue of $100,000, a “decent” credit score, and at least one year in business. Plus, you can apply with this asset-based lender online in minutes and receive funding as fast as one day.
How to Apply for Asset-Based Lending
When you’re applying for an asset-based loan, there are certain steps involved in the process that will vary a bit in comparison to applying for traditional business loans.
Here’s a breakdown of the steps you can follow when applying for asset-based lending:
1. Evaluate your business financials.
Although asset-based lenders are primarily concerned with the value of your business’s assets—that doesn’t mean they don’t care about your business’s financial standing.
Even if your asset-based lender doesn’t ask to see all of the following documents, it’s a good idea to prepare and review them ahead of time:
- Balance sheet
- Profit and loss statement
- Sales forecast (particularly helpful for newer businesses)
- Business bank statements
- Business tax returns
2. Identify your assets.
Next, use these additional documents to determine (and prove) your assets and their values to your potential lenders.
- Accounts receivables aging statement: Compile an accounts receivables aging statement that shows which invoices are outstanding, along with due dates and any past due invoices
- Inventory list: Assemble a list of the inventory you have, where it’s stored, and its approximate resale value. Note that if your inventory were to be liquidated in the event of a default, your lender would probably have to sell it at a lower price than your customers would ordinarily pay—so the resale value will be less than the product’s retail value.
- Machinery and equipment list: Make a list of each and every piece of equipment or machinery your business owns. Detail each item’s purchase price, whether it was purchased new or used, its age, where it’s stored (i.e. warehouse location), and its condition. Research average depreciation for the equipment to estimate its current value or work with an appraiser to get an independent valuation. Record all values in a spreadsheet to give your asset-based lender along with the rest of your application.
Once you’ve gathered this information about the assets on your balance sheet, you can determine whether they’re eligible for use as collateral for an asset-backed loan.
3. Make sure assets are “free and clear.”
After receiving your application, a business lender will perform a UCC (Uniform Commercial Code-1) search on your company. This search tells the lender whether any other creditor has a legal interest—known as a general asset lien—against your personal or business property.
Asset-based lenders look for borrowing relationships where the borrower’s assets are “free and clear,” meaning no other debtors have rights to that property. In other words, the asset-based lender wants to be in the first position to repossess those assets in the event of a default.
If you have outstanding debt or signed a collateral agreement on an existing loan, it’s possible that the first rights to your assets are tied up with another lender—and the asset-based lender in question will have to get in line before they can recoup their losses.
If you’re not sure whether there may be a general lien outstanding against your property, you should perform your own UCC search to determine your status before submitting a loan application. You can search online for the state in which your business is registered, as UCC-filings are public record.
If you do have outstanding debt, talk to your current lenders and make sure you understand the status of that debt and how those debt claims impact your business’s fixed assets. You don’t necessarily have to close out existing debt to obtain an asset-based loan, but there’s a good chance that doing so will make the application process easier.
4. Complete your application and submit your documents.
The next step is to complete your asset-based lending application and submit the necessary paperwork. Alternatively, you could work with a loan specialist to help you through the process.
Be aware that some lenders might require that you have your financials audited by a third-party agency before your application can be processed, so check directly with the lender to clarify first.
Once you’ve officially submitted your application, you might need to wait a few days to a few weeks for the lender’s initial review. If the lender thinks you’re a strong candidate for an asset-backed loan, they’ll contact you to begin the due diligence period of your business loan application.
5. Preview your offer and commit to due diligence.
Lenders have to put in a lot of work to complete due diligence, or a review of your collateral, for asset-based loans so they might ask you for a preliminary commitment. Otherwise, they run the risk of putting in all that time and effort for a borrower who doesn’t follow through.
Their request for this due diligence commitment will likely come after they finish an initial review of your application and financials. At that point, if the lender is interested in working with you, they’ll present a preliminary offer detailing the loan amount, interest rate, and terms they might be able to provide.
Remember that this is a non-binding preview of what the lender believes they’ll be able to offer, not a final offer.
If you’re interested in the lender’s preliminary offer, they’ll ask you to sign a term sheet and pay a due diligence fee for their work. At that point, you’re essentially committing to proceeding with the loan approval process.
6. Undergo a field audit.
As part of the due diligence process, your lender will conduct a field audit of your business. During the audit, a representative will meet with you in person to gauge whether there’s a good fit between you and the lender. They’ll visit your office space, audit your accounts receivable documents and other financial paperwork, and examine any physical assets—like inventory or equipment—that will serve as collateral for the loan.
Asset-based lenders put a particular emphasis on building long-term relationships with their borrowers, even more so than most traditional lenders. They’ll use this time to establish a rapport with you and to evaluate whether they can foresee a positive relationship in the future.
Note that if you are approved for an asset-backed loan, your lender will continue to perform periodic audits of your collateral to check up on its value.
7. Wait for final approval and funding.
After you’re approved for your asset-backed loan, there will likely be some paperwork to sign and a final business loan agreement to review. Once all the documentation is complete, however, you should have access to your funds within just a few days after closing.
The Bottom Line
At the end of the day, as with any major financial decision you’ll make as a business owner, the choice to pursue an asset-backed loan is one that only you can make.
But as you review the assets your business owns, your financial history and projected financial growth, and why you need your loan, it’ll likely become clear whether asset-based lending or more traditional lending is the best avenue for your business.