What is asset-based lending?

How does asset-based lending work?

Asset-based lending is often used by small to midsize businesses that are ineligible for traditional lending. It has also become a popular option for businesses that want to explore other forms of financing.

The terms of an asset-based finance facility depend on the asset’s type and value. Interest rates vary across lenders and may depend on factors such as your credit history, cash flow, and the number of years your business has been trading.

Requirements for asset-based lending in the UK

In the UK, a host of lending platforms and high-street banks provide asset-based lending. Asset-based lenders typically look at whether you’re an established business with substantial assets and a trading history.

Additionally, lenders have their own criteria and ways of conducting due diligence. To understand what your options are, you will need to speak to a few lenders and compare what’s on offer from each of them.

The pros and cons of asset-based lending for your company

To make an informed decision about asset-based lending for your business, you’ll also need to weigh the potential benefits and drawbacks.

Let’s explore the main pros and cons of this form of finance.

Advantages

Asset-based lending allows you to leverage your fixed assets to access consistent cash flow to meet your commitments, grow your business, or fund major projects.

As you’re borrowing against your assets, qualifying for finance may be easier and come with lower interest rates than traditional lending.

Cash secured through an asset-based lending facility comes with no loss of equity or restrictive spending conditions. It can be used however you see fit for your business.

Disadvantages

Only businesses with stable balance sheets, substantial business assets, and a trading history qualify for asset-based lending.

Assets must meet specific criteria to be used as collateral. An asset must be of high value and have a low depreciation or high appreciation rate.

Lenders also prefer liquid assets and may offer better terms for them. In contrast, illiquid assets, such as property, which are considered riskier, may mean lower loan amounts.

Remember, if you fail to pay your loan, you will incur additional charges and risk losing valuable assets, which may significantly impact your operations.

Is asset-based lending the best way forward for your business?

Generally speaking, these are the questions you will need to ask yourself when comparing finance quotes and before proceeding with asset-based lending from your preferred lender.

● What is the advance rate against your various assets?
● What is the interest rate?
● How much will the finance facility cost you over the long term?
● How long is the loan period?
● What are the charges for early settlement?

Ultimately, you will need to leave no stone unturned during the research process. Discuss your unique requirements with several trusted finance providers, and you will be able to make an informed decision about what’s best for your business.