If you’re looking to borrow a large sum of money for your business or reduce potential interest rates on what you borrow, offering some form of asset as security can help. Asset-based lending (ABL) is a type of loan or financial agreement in which you use business assets as collateral to obtain capital.
In this article, we discuss the different forms of ABL, how they work, the main benefits and other key considerations when weighing up your finance options.
What is asset-based lending, and how does it work?
Asset-based lending is a secured business finance agreement, where you offer assets as collateral to secure the capital, giving lenders a route to recoup lost funds if your business defaults on repayments. This is in contrast to an unsecured business loan or finance agreement, where no collateral is required.
What are the advantages of asset-based lending?
The advantage of asset-based lending is the ability to unlock working capital based on your existing assets, turning them into liquidity to manage day-to-day operations or invest in growth opportunities.
- Asset-based lending focuses more on the value of the borrower’s assets than their credit history or cash flow.
- Lenders assess the asset's value to determine the loan amount, often using a loan-to-value (LTV) ratio. The higher the asset's liquidity and resale value, the more favourable the LTV ratio, which can range from 50% to 80%.
This can help you access larger sums at lower rates, but puts your assets at risk. For businesses with valuable assets but inconsistent cash flow or lower credit scores, asset-based lending is an effective way to unlock liquidity and access funds for working capital, expansion or new investments.
What are asset-based loans used for?
Asset-based loans are widely used for a variety of business purposes, including:
- Working capital: These loans can help businesses maintain liquidity using the value of existing assets as security to get an injection of cash to cover operational expenses.
- Inventory purchases: Retailers and manufacturers can use asset-based finance to buy new stock, especially during peak seasons, to meet demand.
- Financing new equipment: Companies can secure loans to purchase or upgrade machinery, vehicles and equipment, using the assets as collateral.
- Business expansion: Asset-based loans provide the capital required for expanding a business, whether by opening a new location, investing in new technology, or entering new markets.
- Debt refinancing: Businesses with multiple existing debts may consolidate them using an asset-based loan, often offering better terms or lower rates.
What are the different types of asset-based lending?
There are numerous financial products that are backed by assets, suiting different kinds of businesses and funding needs. Below, we’ve outlined the main types of asset-based lending to explore:
- Secured business loans: Traditional, longer-term loans offered by banks and financial institutions, that involve a lump sum payment to be repaid over a period of monthly instalments, plus relatively low interest rates.
- Asset and equipment finance: A range of finance agreements for hiring or acquiring new or used assets, including hire purchase or finance lease deals. These usually involve an initial deposit, followed by instalments and an option to return or buy the asset at the end of the term.
- Commercial mortgages: Long-term mortgage agreements for property and land purchases for business purposes.
- Property development loans: Short-term loans used specifically for construction projects and property development, with funds usually paid out in stages, once key project milestones are completed.
- Invoice finance: For businesses with strong accounts receivable but lengthy payment cycles, invoice financing allows you to access cash tied up in unpaid invoices. Lenders advance a percentage of the invoice value, which can be used as immediate working capital.
- Inventory finance: A specialist loan to fund the purchase of new inventory, usually with existing inventory and/or other assets used as collateral.
- Bridging loans: Short-term loans for investors and business owners who need to cover a temporary funding gap, usually for a large-scale business purchase, like property. Repayments are made once an asset is sold or when a longer-term finance agreement is in place.
- Trade finance: Various forms of credit for those involved in importing and exporting goods, with bank guarantees, letters of credit, invoices or goods used as security in the agreements.
Understanding the costs involved in asset-based lending
As with any business finance agreement, there are various potential costs of borrowing to be aware of, including the rate of interest charged, arrangement fees, broker fees (if a broker is used) and early repayment charges, if your lender charges a fee to enable you to repay the loan before the end of the term.
Costs unique to asset-based lending are fees involving the use of assets to secure the loan. Lenders can charge several types of fees, such as:
- Valuation fees – this is the fee for assets being valued ahead of being committed as collateral, with costs varying depending on the number, type and complexity of assets used.
- Documentation fees – some lenders charge for the administration related to establishing assets for security, in addition to arrangement fees.
- Legal fees – asset-based security often requires various legal work, including registering charges on the loan, reviewing documentation and due diligence.
- Non-commitment fees – some ABL finance lenders charge fees for maintaining the facility where there are any undrawn funds, more commonly seen in property development finance.
So, while these fees may be charged at just a few per cent of the loan amount, they all add up and should be considered when calculating the cost of borrowing.
It’s worth noting that many unsecured loan providers, like iwoca, don’t charge for early repayment. Also, we only charge interest on the funds you draw down.
Typical asset-based lending rates
In general, asset-based lending rates are lower than in unsecured finance arrangements, as the security reduces lenders’ risk. There’s not necessarily a typical rate, due to the various factors at play, such as the type of loan or debt finance product used, the length of borrowing, the amount sought and other influencing factors. However, businesses can expect to be offered annual interest rates of between 6% and 15%.
What assets can be used to secure business finance?
Different types of assets can be pledged to secure an asset-based loan, and the suitability of each depends on its liquidity, value, and risk level. The most common assets used include:
- Accounts receivable: These represent money owed to your business by customers. Lenders value accounts receivable highly because they are considered a near-term cash inflow. You can borrow up to 80% of the value of your receivables.
- Inventory: Stock or goods ready for sale can be used as collateral, especially for retail or manufacturing businesses. Typically, lenders may offer 40-60% of the value of the inventory.
- Machinery and equipment: Large, expensive equipment such as manufacturing machines, medical devices, or vehicles can serve as collateral. Depending on the depreciation (loss in value over time) of these assets, you can borrow up to 60% of their value.
- Real estate: Property, including land and buildings, is one of the most valuable forms of collateral due to its stability and long-term value. Loans backed by real estate can offer up to 70-80% of the property’s value.
- Intellectual property: Patents, trademarks, or copyrights can also be used as collateral. While this is less common, businesses with significant intellectual property value can use it to secure funding.
How does asset-based finance loan-to-value (LTV) work?
The loan-to-value (LTV) ratio is a key consideration in asset-based lending, as it determines how much of the asset’s value can be borrowed. Lenders typically offer varying LTVs depending on the asset's type, liquidity, and risk.
For example, a business with £1,000,000 in commercial property may secure a loan of £700,000 to £800,000, whereas equipment valued at £500,000 may only result in a £325,000 loan.
Higher LTV ratios generally indicate a lower risk for the lender, as they can recoup a larger portion of the loan by liquidating the asset in case of default.
Comparing asset-based lending vs. unsecured loans
While asset-based lending is ideal for businesses with lots of assets, unsecured loans offer a more flexible option for companies that may not have valuable collateral or don’t want to risk losing their assets.
Below, our handy comparison table summarises how asset-based lending and unsecured loans compare across various key areas:
| Factor |
Asset-based lending |
Unsecured loans |
| Collateral requirements and risk |
Requires physical or financial assets to secure capital (e.g., property, equipment, invoices). Lenders can seize pledged assets if you miss or default on repayments. |
No collateral is required, with lending based on creditworthiness and business performance. No risk of business asset loss, but a personal guarantee may be requested. |
| Interest rates and borrowing costs |
Generally lower interest rates due to security, but extra costs often apply, such as valuation fees, legal fees, arrangement fees, etc. |
Higher interest rates may apply due to greater lender risk. Fewer additional costs, though arrangement or broker fees may still apply. |
| Loan amounts available |
Larger loan amounts available by leveraging high-value assets like real estate, machinery and other equipment. |
Typically, smaller amounts, but some lenders offer up to £1 million for various business purposes. |
| Level of flexibility |
Often longer-term and less flexible than unsecured finance, tied to the value of assets, with stricter conditions around usage and repayments. |
Shorter-term finance that offers greater flexibility, such as the use of funds with fewer restrictions and options to repay early free of charge. |
Asset-based lending vs. cash flow-based lending
The simple difference between asset-based lending and cash flow-based lending is that with ABL, tangible assets are used to secure the loan or finance agreement, while cash flow lending is based on current and projected future cash flow.
Although there are cash flow loans that are unsecured, used specifically for cash flow management and structured according to cash flow needs and project cycles (ideal for retailers, manufacturers or construction firms), cash flow-based lending usually refers to cash flow projections being used as security. In this latter case, loans are backed by past and projected cash flow, assessed in the underwriting process, rather than requiring physical collateral.
Cash flow-based lending suits companies with regular high margins but limited tangible assets to offer as collateral, using expected revenues as an alternative to secure the loan. Lending rates for cash flow-based loans are often higher than ABL due to the security being backed by numbers rather than physical assets
.
Asset-based lending providers in the UK
You can apply for asset-based finance through various sources in the UK, from high-street banks and challenger banks to specialist lenders (like property finance lenders) and digital finance providers.
Due to the choice between numerous different asset-based lenders in the UK, and various forms of ABL products, you need to do extensive research, clearly scope out your funding needs, compare lenders and repayment models and calculate the total cost of borrowing for each. Then weigh up the pros, cons and costs to judge suitability.
Alternatives to asset-based finance
There are several alternatives to asset-based lending available to businesses that either don’t have available assets or prefer not to risk them.
Here are some asset-based lending alternatives to consider:
- Unsecured business loans: As mentioned earlier, unsecured loans provide fast access to capital without needing collateral. This makes them ideal for businesses that rely on cash flow rather than physical assets.
- Merchant cash advances: These revenue-based finance solutions provide businesses with a lump sum in exchange for a portion of future sales, offering quick access to cash without collateral.
- Business lines of credit: Using a line of credit enables you to borrow up to a pre-approved limit, drawing from the facility as and when required, only paying interest on the funds used. It’s a flexible solution for businesses with variable capital needs.
- Equity finance: From venture capitalists and angel investors to crowdfunding, equity finance offers a way to get large sums of capital that doesn’t require repayment. Instead, it involves giving up a level of control and future profits in exchange for the investment.
Flexible business funding with iwoca
If your business needs significant funding, but you don’t have or want to risk valuable business assets, a flexible business loan may be your ideal option. iwoca Flexi-Loans are unsecured loans tailored to your needs and cash flow, with short and longer-term options.
Benefits of our flexible business loans include:
- Fast access to funds – expect funding decisions within 24 hours (and same-day access to funds), ideal for when you need financing fast.
- Flexible repayments – we offer repayment terms that adapt to your business cash flow, with no charges for early repayment.
- No collateral needed – iwoca’s loans are unsecured, meaning you don’t have to put up valuable assets to obtain funding.
- Transparent fees – you’ll always know exactly how much your loan will cost from the outset, with no surprises.
Borrow £1,000–£1 million for a matter of days and weeks or up to 60 months – join the 150,000+ businesses that use iwoca finance to grow and invest in their future. Try our business loan calculator to see how much you could borrow.
