Asset-Based Lending
While traditional business financing is based on your business cash flow, asset-based lending refers to borrowing based on your business assets. Asset-rich companies can use this type of financing to access working capital with fewer restrictions and more financial flexibility.
- Asset-based lending is a type of business financing that is primarily centered around the value of your assets, like your inventory or invoices.
- With asset-based financing, lenders allow you to borrow a percentage of an asset’s value, using it as collateral to secure the loan. In some cases, you may be able to combine the value of multiple business assets to secure a larger loan amount.
- Some lenders offer asset-based loans, while others provide asset-based lines of credit. Because both are secured by collateral, asset-based financing can offer lower rates than traditional cash flow financing.
What is asset-based lending?
Asset-based lending (ABL) is a type of secured financing in which business assets — like your inventory, invoices, equipment or real estate — serve as collateral.
Asset-based loans can be easier to qualify for than traditional small business loans, which base eligibility on your business cash flow and credit history. By comparison, asset-based lenders typically base eligibility on the value of the assets being used as collateral.
That being said, asset-based lending puts your business assets on the line. If you default on your loan, your lender can seize and sell your assets to recover its losses.
How does asset-based lending work?
With asset-based financing, you can use your business assets to secure working capital. The total amount you can borrow with an asset-based loan depends on the lender, but it’s typically equal to a certain percentage of the value of the business’s assets. This is called a borrowing base, which is a specific loan-to-value (LTV) ratio used in asset-based lending.
To calculate the borrowing base and determine your loan amount, lenders will typically follow these steps:
- Identify eligible assets: Many lenders prefer liquid collateral (like accounts receivable) that can be quickly and easily converted to cash if you default on your loan, but physical assets (like equipment) can also be used as collateral.
- Estimate fair value: Each asset needs to be appraised to assign a fair value. For example, inventory may be priced based on its market value, while accounts receivable may be valued based on aging reports. To determine the value of physical assets on a business’s balance sheet, lenders may need to conduct field examinations.
- Apply advance rates: The advance rate is the percentage of value the lender is willing to give out based on the collateral quality and borrower risk. Many lenders set different advance rates for different types of collateral, with liquid assets typically receiving the highest advance rates.
- Calculate adjusted values: The advance rate for each asset is applied, and the lender calculates the total loan amount they can offer based on the collateral you provided.
Once you’ve agreed to the terms and signed a loan agreement, your lender will file a UCC filing, which is the form that establishes their legal right to seize specific assets if the loan defaults.
Let’s say you’re looking to borrow $100,000 to grow your business. You have $80,000 in unsold inventory and $60,000 in outstanding invoices that can be used as collateral to secure the loan. In this scenario, the calculation of your borrowing base would look as follows:
(Accounts Receivable x Advance Rate) + (Inventory x Advance Rate) = Borrowing Base
Now let’s assume that the lender is willing to advance 85% of eligible invoices and 50% of eligible inventory. Adding the asset values and advance rates into the formula, the maximum amount you would be able to borrow comes to $98,000.
($80,000 x 0.85) + ($60,000 x 0.50) = $98,000
Although this amount is slightly lower than what you originally intended to borrow, it could still be enough to achieve your goals. And because the loan is secured by business assets, you may receive a more favorable interest rate than you would with unsecured business financing.
Asset-based lending vs. cash flow lending
There are multiple types of debt financing for small businesses, but they all fall within two overarching categories: asset-based financing and cash flow financing.
When you think of traditional business loans, cash flow loans are likely what you have in mind. With this type of financing, lenders base eligibility on your overall business finances, which can make it difficult to qualify if you have low revenue or a rocky credit history. If you have valuable business assets, you could find it easier to qualify for asset-based financing options.
Here’s a closer look at how these two types of lending are different:
| Asset-based lending | Cash flow lending | |
|---|---|---|
| Collateral? | Yes | Usually not required for qualified borrowers, but might be required for borrowers with bad credit or minimal cash flow |
| Eligibility | Based primarily on the value of your business assets | Based primarily on credit score, time in business and annual revenue |
| Loan amounts | Determined by the value of your collateral | Determined by your business finances, including annual revenue, credit history and debt ratio |
| Rates and terms | May be more favorable because the collateral minimizes lender risk | May be less favorable due to higher lender risk, though the most qualified of borrowers may still qualify for competitive rates |
It’s important to note that your revenue and credit history are usually still considered when you apply for an asset-based loan. However, there is less importance put on these factors and more importance put on the value and condition of your business assets.
With a cash flow loan, your revenue and creditworthiness are the top priority, and collateral may be used as a secondary layer of defense against risk. With an asset-based loan, the collateral is the first point of consideration, but other factors may still be considered during the underwriting process.
Types of asset-based lending
There are multiple financing options that fall within the category of asset-based lending. While some loans may use a specific asset as collateral, others may use multiple (or all) of your business assets to secure the loan.
Here are a few of the most common asset-based loans on the market.
Secured business loans
Both traditional banks and alternative lenders offer secured financing options, which are often targeted at newer businesses and businesses with less-than-perfect credit. A secured business loan is a type of term loan that is secured by collateral. It comes with a fixed interest rate and a set repayment schedule.
However, lenders will still weigh your business cash flow when they consider you for a secured business loan. Though credit and cash flow requirements may be lower, you’ll still need to meet a certain threshold to qualify, and your maximum loan amount may be determined based on both your cash flow and your collateral.
Secured lines of credit
For business owners that prefer ongoing access to funds, secured lines of credit are also available. Revolving lines of credit allow you to withdraw funds as needed up to a predetermined amount. As you make payments on your balance, your available credit typically replenishes, allowing you to borrow against your credit line again.
Like business loans, lines of credit may be secured by cash savings, investments, equipment or real estate. While some lenders may offer true asset-based credit lines, which base eligibility entirely on the value of your business assets, others may consider both your cash flow and collateral to determine if you’re eligible for financing — and if so, how much.
Accounts receivable financing
Accounts receivable financing, or AR financing, is a type of asset-based lending that allows businesses to borrow against their unpaid invoices, also known as accounts receivable.
With this type of financing, lenders advance a percentage of your outstanding invoices in the form of a term loan or line of credit. Advance rates vary between lenders, but you can typically expect them to advance between 70% and 90% of an invoice’s value. Once your customer pays their invoice, you’ll repay the loan plus fees and interest.
In this arrangement, your invoices serve as collateral on the loan. Keep in mind that lenders will typically only accept invoices that are less than 90 days old, or no more than 60 days past due.
Accounts receivable financing, or invoice financing, is often confused with invoice factoring, but the two are not the same thing. Invoice financing involves using your invoices as collateral to get a secured, asset-based business loan. In this arrangement, you retain ownership of the invoices and repay the loan with interest once they are fulfilled.
By comparison, invoice factoring involves selling your unpaid invoices to a factoring company, at which point they become the owner of the debts and handle collecting payments from your customers. Because you’re transferring ownership of the invoices, invoice factoring isn’t technically a loan — it’s a cash advance.
The factoring company pays you a percentage of the approved invoice, usually between 70% and 90% of the total invoice amount. Once your customer pays the factoring company, they’ll send you the remaining balance of the invoice minus any applicable fees.
Equipment financing
Equipment financing provides the necessary funds to purchase or upgrade essential equipment like computers, vehicles or large machinery. With an equipment loan, the equipment being purchased is used as collateral, allowing some lenders to offer generous loan amounts and flexible down payment requirements.
Equipment loans provide a lump sum of cash that is repaid in fixed installments over a specified period of time — usually between one and five years, though some lenders may offer longer repayment terms. Regardless of the loan term, you can usually deduct the cost of equipment on your business taxes.
Commercial real estate loans
A commercial real estate loan is essentially a mortgage for your business property. Commercial mortgages typically require at least a 20% down payment, and they may also require a balloon payment at the end of the loan term. The loan amount is determined based on the property’s fair market value, which is usually established through a third-party appraisal.
While the property serves as collateral, your business finances can also play a role in qualifying for a commercial real estate loan. Although your business cash flow usually isn’t the lender’s top concern, because loan amounts can go quite high many lenders will still consider your creditworthiness to minimize their risk. Keep in mind that getting approved based on the value of the property alone may mean paying a higher interest rate.
Pros and cons of asset-based lending
Pros
- Competitive interest rates. Using business assets as collateral minimizes risk for the lender, which often allows them to offer lower interest rates.
- Flexible use of funds. With the exception of equipment and real estate loans, asset-based lenders generally don’t restrict how you use your loan funds, so you can put the cash toward a variety of projects.
- Can be easier to qualify for. Because approval is largely based on the value of your business assets, asset-based financing can be easier to qualify for than traditional loans based on cash flow. This makes asset-based loans more accessible for startups, businesses with low revenue and those with limited credit.
- Fewer financial covenants. Cash flow loans come with covenant requirements, which are conditions you must meet throughout your loan term to continue to demonstrate your creditworthiness. For example, you might need to maintain a certain debt ratio to avoid penalties and other issues with your lender. But asset-based loans have fewer financial covenants, giving you more flexibility.
Cons
- Some business assets may not qualify. The lender will decide which business assets are eligible for asset-based financing — and some may not be willing to accept branded inventory, specialized equipment or overdue receivables as collateral.
- Costs and fees apply. Although asset-based loans may have lower interest rates than unsecured loans, you’ll need to be prepared to pay other costs. For example, you may have to pay origination fees as well as fees to assess and monitor your collateral.
- Additional reporting may be required. Your lender may require you to file weekly or monthly reports on the status of the assets being used as collateral, adding to your administrative responsibilities.
- Risk of losing business assets. If you default on your loan, any assets you used as collateral can be seized by the lender to recoup its losses. To avoid this, you’ll need to make sure you keep up with loan payments and reporting requirements.
Is asset-based lending right for your business?
Asset-based lending plays an important role in the business space, but it isn’t right for everyone. You’ll need to weigh all the potential risks and rewards before you put your business assets on the line. That said, an asset-based loan or line of credit might make sense for:
- Asset-rich companies. If you have valuable assets and you need funds, an asset-based loan could be a good fit. Manufacturers, distributors and businesses in other asset-intensive industries tend to be some of the best candidates for asset-based financing.
- Seasonal businesses. If you run a seasonal business with revenue that fluctuates throughout the year, it can be challenging to secure traditional financing while navigating seasonal peaks and dives. But if you have the necessary collateral, an asset-based loan could provide the funds you need even if your current cash flow is down.
- Business owners with credit concerns. Though many asset-based lenders will still consider your creditworthiness, it isn’t their top priority, which can be a breath of fresh air if you lack the credit score needed to qualify for a cash flow loan. Still, remember that your borrowing power will be limited by the value of your business assets.
Compare business loan offers
Read more
Best long-term business loans Updated December 30, 2024 Long-term business loans offer repayment periods that can reach up to 10 years, making them…Read more
Best Secured Business Loans in November 2025 Updated April 30, 2025 Secured business loans are “secured” by some form of collateral. Security for the lender may…Read more