Asset-based lending lets a business borrow against what it already owns. The lender looks at the value and quality of the assets on the balance sheet, mainly unpaid invoices, stock, plant and property, and sets the facility by reference to them. Trading history and credit record still count. The assets carry more weight.
That makes it a useful route for companies that are growing faster than their cash. A manufacturer with large unpaid invoices, a wholesaler carrying heavy stock or a business coming out of a difficult year can often raise more against its assets than a high street bank would lend against its profits. This page explains how asset-based lending works in the UK, what you can borrow, what it costs and when it is the wrong tool.
Thinking about asset-based lending for your business? Speak to a specialist before you apply.
What Is Asset-Based Lending?
Asset-based lending, often shortened to ABL, is a revolving facility secured on a company’s assets. The lender takes a charge over them and agrees a limit that moves up and down with the value of what is pledged. As you raise invoices or build stock, the amount available rises. As invoices are paid and stock is sold, you repay and the amount you can draw falls.
The figure that controls this is the borrowing base. It is the eligible value of each asset class multiplied by the advance rate the lender applies to it. The lender recalculates it from the figures you send in each week or month, and you can only draw up to the lower of the facility limit and the borrowing base.
That is the main difference from a term loan. A term loan pays out one sum that you repay on set dates. An asset-based facility gives you a limit that follows the business.
Assets You Can Borrow Against
Most facilities combine several asset classes. The advance rate is the share of an asset’s value the lender will lend against. The figures below are broad ranges. Each lender sets its own, depending on the sector and the quality of the asset.
| Asset | Typical advance rate | What the lender looks at |
|---|---|---|
| Trade debtors (unpaid invoices) | 80% to 90% of eligible invoices | Age of invoices, customer quality, concentration, disputes and credit notes |
| Stock and inventory | 30% to 60% of cost or value | How fast it sells, whether it goes out of date, how easily it can be sold on |
| Plant and machinery | 50% to 80% of forced sale value | Age, condition, resale market and any existing finance on it |
| Property | 50% to 75% of value | Valuation, tenure, use and any existing charges |
Unpaid invoices are the most useful asset because they turn into cash quickly. Stock is the hardest to lend against, because a lender has to think about what it would fetch in a forced sale. Intellectual property and marketable securities can sometimes be included, though fewer lenders will take them.
Not every invoice counts. Lenders usually exclude invoices that are more than 90 days old, owed by connected companies, subject to a dispute or owed by a customer who accounts for too large a share of the ledger. What is left is called the eligible ledger, and the advance rate applies only to that.
A Worked Example of the Borrowing Base
Take a UK manufacturer with a debtor ledger of £800,000, stock at cost of £400,000 and plant that would fetch £250,000 in a forced sale. Once old and disputed invoices are stripped out, 90% of the ledger is eligible.
- Debtors: £800,000 x 90% eligible x 85% advance rate = £612,000
- Stock: £400,000 x 50% = £200,000
- Plant: £250,000 x 60% = £150,000
- Borrowing base: £962,000
The business can draw up to £962,000, and as little as it likes below that. If it draws £600,000 and the lender prices the facility at 8% on drawn funds, interest comes to £48,000 a year, or £4,000 a month. A 1.5% arrangement fee on a £962,000 limit adds £14,430. These rates are illustrative and your own terms will differ.
What stands out is that the facility is worth far more than the profit figure suggests, and the invoices carry most of the weight. A shrinking or ageing ledger pulls the base down with it.
Benefits of Asset-Based Lending
Higher limits. A facility sized to the balance sheet can run well above a cash flow loan, and the gap is widest for companies that hold a lot of stock or equipment.
Funding that grows with the business. Because the limit follows the debtors and stock, the facility grows alongside the business if sales double, without a new credit application.
Access when profits are thin. A business that has had a poor year or is recovering from a loss can often still borrow, because the lender is relying on the assets and on the customers who owe the money.
Flexibility. You draw what you need and pay interest on what you use. Seasonal businesses in particular use this to fund the build-up to a peak.
No equity given away. Asset-based lending raises working capital without selling shares. Ownership stays where it is.
How Lenders Assess an Asset-Based Application
A lender works from two questions: how good are the assets, and how well is the business run?
On the assets, it looks at the debtor ledger first. It wants to know who owes you money, how long invoices take to be paid, how much sits with your top customers and how often invoices are reduced by credit notes or disputes. It then looks at stock records, the age and condition of plant and, where property is involved, a valuation.
On the business, it reads the balance sheet and recent accounts, and it tests liquidity. The current ratio compares current assets with current liabilities. The quick ratio strips out stock and is a harder test. Lenders also want to see cash flow forecasts and a debtor and creditor ageing report, and they expect them to arrive on time, month after month.
Reporting is the part many first-time borrowers underestimate. A lender that cannot see an up-to-date ledger cannot set an up-to-date borrowing base, and it will reduce what you can draw until it can. Monthly management accounts, an ageing report, a stock listing and a cash flow forecast form the usual minimum.
The Asset-Based Lending Process
Application. You submit recent accounts, management figures, debtor and creditor ageing reports, a stock list and details of any asset finance or charges already in place. A broker can set this out in the form a lender expects, which often saves a round of questions.
Due diligence. Most lenders carry out a field audit, sometimes called a field exam. A lender’s team visits the business, checks a sample of invoices back to the sales records, counts stock and checks the controls around cash collection. Larger facilities may also involve a valuation of plant, stock or property.
Terms. Once the audit is satisfactory, you receive a term sheet setting out the limit, advance rates, pricing, fees, reporting duties and any covenants. Legal documents follow, including the charge over your assets and, in some cases, a personal guarantee or director’s undertaking.
Once the facility is live, you send regular reports, the lender recalculates the borrowing base and repeats the audit each year, sometimes more often. Facilities are usually committed for one to three years and renewed at the end of the term.
What Asset-Based Lending Costs
Pricing is normally a margin over base rate on the funds you draw. The margin depends on the strength of the borrower, the mix of assets, how concentrated the debtor ledger is and how much monitoring the lender has to do. All-in rates are generally higher than a bank term loan secured on property, and lower than most unsecured short-term borrowing.
Alongside interest, expect the following.
- An arrangement fee, commonly 1% to 2% of the facility limit
- A monitoring or service fee, charged on the facility or on turnover
- Audit and valuation fees, paid by the borrower
- A fee on unused headroom with some lenders
- Early termination charges if you leave before the committed term ends
Read the fee schedule as carefully as the headline rate. A facility with a low margin and heavy charges for audits and account checks can cost more than one with a higher margin and lighter charges.
Asset-Based Lending Compared With Other Funding
Invoice finance. Factoring and invoice discounting lend only against the debtor ledger, and the funder frequently collects payment straight from your customers. Asset-based lending can add stock and plant to the debtor book, and that normally gives a larger facility.
Asset finance. Hire purchase and leasing pay for a single machine or vehicle over a fixed term. Asset-based lending is a single revolving line secured on the whole business.
Bank overdraft or term loan. A bank will normally lend against profit and cash flow, and may ask for property or a personal guarantee as security. If the trading record is thin or the balance sheet is stronger than the profit and loss account, asset-based lending can offer more.
Purchase order finance. This pays the cost of delivering one customer order. The scope is narrower and the monthly cost is usually higher, which suits a one-off contract better than day-to-day working capital.
Where Asset-Based Lending Works Well
Funding growth. Higher sales mean higher invoices and more stock, and the facility rises with them. A business can take on a larger contract without waiting for its cash to catch up.
Managing working capital. Cash is often tied up between paying suppliers and collecting from customers. An asset-based facility bridges that gap and can also let you pay suppliers early and earn a discount.
Acquisitions and buyouts. The target company’s own assets can serve as security. That can help fund an acquisition or a management buyout alongside other finance.
Turnaround and restructuring. A business that has lost money but has good debtors and stock can sometimes still draw on them while it recovers.
Seasonal trading. A seasonal business buys stock ahead of its peak and pays for it from the sales that follow. A revolving limit follows that rhythm better than a fixed loan.
When Asset-Based Lending Is Not the Right Choice
Service businesses with few physical assets and no sizeable debtor ledger will find it harder to use. It is also a poor fit for a company that cannot report reliably each month. Very small borrowers can struggle too, because the cost of monitoring weighs heavily on a small facility. Some lenders set a minimum facility size. A very small requirement may be better met with invoice finance, asset finance or a business loan.
Control shifts too. The lender has a charge over the assets, can audit you, and can cut your availability when the debtor book weakens. Think about how a fall in sales, a large customer failing to pay or a stock write-down would reduce your borrowing base, and whether the business could cope.
How a Broker Helps With Asset-Based Lending
Asset-based lenders differ in the assets they favour, the sectors they will back, the minimum size they work to and the reporting they demand. Two lenders can look at the same ledger and reach quite different limits. A broker who deals with these lenders regularly can match the structure to your balance sheet, prepare the application, and tell you at the outset which lenders are likely to engage. That saves you from spending audit fees on a lender that will not proceed.
Frequently Asked Questions
What is asset-based lending?
Asset-based lending is a revolving facility secured on a company’s assets, such as unpaid invoices, stock, plant and property. The limit is set by the value of those assets and moves up and down as they change.
What assets can I borrow against?
The most common are trade debtors, stock, plant and machinery, and property. Unpaid invoices usually attract the highest advance rate and stock the lowest. Some lenders also accept intellectual property or marketable securities.
How much can I borrow with asset-based lending?
The limit is the borrowing base, which is the eligible value of each asset multiplied by the lender’s advance rate. Unpaid invoices are often funded at 80% to 90%, stock at 30% to 60% and plant at 50% to 80% of forced sale value.
How much does asset-based lending cost?
Most facilities are priced as a margin over base rate on the funds you draw, plus an arrangement fee, commonly 1% to 2%, and fees for field audits and account checks. The total depends on the quality of your assets, the concentration of your customers and the size of the facility.
Is asset-based lending the same as invoice finance?
No. Invoice finance lends only against the debtor ledger. Asset-based lending can also include stock, plant and property, and is usually one larger facility covering all of them.
Do I need good credit to get asset-based lending?
Credit history still counts, but the assets and the quality of your customers carry more weight than they do with a bank loan. Businesses with a weaker profit record or a past setback can often still qualify.
How long does an asset-based facility last?
Facilities are usually committed for one to three years and renewed at the end of the term. Within that period the facility revolves. You draw and repay as invoices are raised and paid.
Can a broker arrange asset-based lending?
Yes. A broker can compare the lenders that suit your assets and sector, prepare the application and manage the process.
Speak to a Specialist
Speak to a specialist commercial finance broker before you apply.
Commercial Finance Network is directly authorised and regulated by the Financial Conduct Authority. Asset-based lending and other business finance is not regulated by the Financial Conduct Authority. Your property may be repossessed if you do not keep up repayments on a loan secured against it.
Call us on 03303 112 646 / 01494 622 111 or email info@cfnuk.com to discuss asset-based lending for your business.
Related Pages
- Commercial Loan Calculator – work out repayments on a business loan before you apply.
- Debt Service Coverage Ratio Explained for Commercial Lending – how lenders test whether your income covers the debt.
- How to Use Equipment Financing to Scale Your Business – funding machinery and equipment as an alternative route.
- Working Capital Loans – funding day-to-day operations for small businesses.
- Exploring Trade Finance – how UK businesses fund buying and selling across borders and on credit.
