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Leverage Business Assets to Access Asset-Based Loans

By Drew Moffitt

Need financing that doesn’t hinge on credit scores or cash flow? Asset-based loans, secured against your company’s assets like inventory and receivables, offer a pathway to capital with less reliance on traditional lending criteria. In this article, we’ll explore what an asset-based loan is, the process for securing one, and how it could be a game-changer for your business’s financial strategy.

Key takeaways

  • Asset-based loans offer companies flexible and strategic financing by using their assets as collateral, providing increased borrowing capacity with potentially lower interest rates compared to unsecured loans.
  • Asset-based lending allows for tailored credit lines and additional working capital that align with a company’s operational needs and cash flow cycles, enabling businesses to manage growth or navigate challenging economic times effectively.
  • Managing an asset-based loan requires effective monitoring of collateral values, strategic utilization of funds for business growth, clear repayment planning, and open communication with lenders to negotiate terms and maintain good standing.

Unlocking the potential of asset-based loans

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Early business growth is often dependent on credit and loans to drive expansion. As a company grows, it acquires assets to use as collateral for loans to drive strategic growth. While all firms should aim to be efficient, sometimes loans are needed to capitalize on a market opportunity. 

Asset-based loans are helpful in the world of business financing, providing a strategic financing option that remains effective even under economic volatility. Unlike traditional loans, asset-based loans are secured against a company’s assets, making them a cost-effective choice credited to high historical recoveries and low loss given default due to the high value of assets involved.

They are versatile, serving various scenarios like accounts receivable financing and inventory financing. The borrowing capacity of asset-based loans, directly linked to the value of business assets like inventory and receivables, often includes a revolving line of credit, possibly complemented by a term loan. From accounts receivable to real estate, a wide range of assets can serve as collateral, opening the door to this strategic financing option for many businesses.

What constitutes an asset-based loan?

Most banks and financial services offer asset-based loans. At its core, asset-based lending is a type of loan secured by various forms of collateral, including:

  • Accounts receivable
  • Inventory
  • Physical assets like machinery and real estate
  • Intellectual property

The business’s assets are assessed for their value and used as security to borrow funds, reducing the emphasis on cash flow and credit history.

In the world of asset-based lending, cash assets, like inventory and accounts receivable, are gold. Lenders prefer these assets, which offer a quicker conversion to cash in the event of a loan default. This reliance on highly liquid collateral underscores the unique nature of asset-based lending.

The advantages of choosing asset-based financing

Any business can start up online, and as soon as it generates value or sales, it can access asset-based lending. That’s not just about leveraging your assets; it’s about maximizing the benefits it brings. One of the primary advantages of asset-based loans is that they offer improved cash flow for businesses. This improved cash flow, coupled with increased borrowing capacity determined by assessing the value of the company’s assets, can significantly boost a company’s financial standing.

The cherry on top? Asset-based lending features flexible credit approval processes, including faster approval times, which enhance business credit availability. It’s not hard to see why companies find asset-based lending an attractive option.

Asset-based lending vs. traditional loans

The world of loans is vast and varied, with asset-based lending and traditional loans occupying unique spaces. While traditional loans are primarily based on cash flow or multiples of EBITDA, asset-based lending uses the company’s assets as collateral. This shift in focus to assets as collateral reduces the lender’s risk, making asset-based loans more accessible than other types of small-business loans.

The advantages of asset-based loans include:

  • Lower interest rates than unsecured loans, often by 150 to 200 basis points
  • Interest rates can vary depending on factors like collateral liquidity, borrower’s credit history, and business duration
  • Terms of the loan are influenced by collateral type and liquidity, as well as the borrower’s credit and operating history.

In contrast to asset-based lending, loaning money through cash-flow lending allows borrowing based on projected future cash flows and often necessitates a stronger credit history.

Tailoring asset-based lending to your business needs

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Every business and its financial needs are unique, and modern cloud- and digital-businesses are typically asset-light operations, aiming for rapid growth. This is where the power of asset-based lending shines. It is a versatile tool during company growth phases or challenging economic times, providing the necessary capital tailored to the business’s requirements.

Whether you’re a manufacturer leveraging your inventory, equipment, and accounts receivable as collateral to secure funding for growth initiatives, or a digital business with strong IP and marketing looking to bridge cash flow gaps, asset-based loans stand ready to serve diverse purposes.

Identifying eligible collateral for asset-based loans

The first step in your asset-based lending journey is identifying eligible collateral. Lenders favor highly liquid assets as collateral for asset-based loans because they can be quickly converted into cash. Marketable securities and certificates of deposit are typical examples of preferred collateral due to their high liquidity compared to physical assets like specialized machinery or goods with high depreciation rates.

Not all collateral is created equal in the eyes of lenders. While accounts receivable may secure up to 80-85% of their value as a loan, inventory collateral often secures around 50% of its value. This variance in loan-to-value ratios is a crucial consideration when choosing your collateral.

Additionally, the depreciation rate of assets plays a crucial role in determining their eligibility as collateral, with assets that retain value over time being more favorable for securing loans.

If you are an intellectual property (IP)-based business, specialist lenders canS provide a better valuation for these and other intangible assets. When considering finance, teams should discuss the options using collaboration tools like Kumospace to better understand their options and ensure everyone understands the financial implications.

Structuring your asset-based credit line

Once you’ve identified your collateral, it’s time to structure your asset-based credit line. An asset-based line of credit can fund business growth opportunities by providing a revolving source of capital. ABL lenders often provide revolving lines of credit, which are preferred over term loans for ongoing working capital and cash flow management.

However, the real magic happens when you tailor the terms of your credit line to match your business’s specific cash flow cycles and operational needs. This customization, coupled with flexible financing options and real-time tracking offered by lenders, can provide a robust financial backbone for your business. Some businesses even consider a combined approach with subordinate debt for more stability.

Gaining access to additional working capital

Asset-based loans aren’t just about borrowing; they’re about gaining access to additional working capital. Small businesses can use asset-based loans to secure this for essential operational expenses, leveraging the value of their assets. These loans offer increased liquidity with fewer covenants, providing businesses with flexible financing for managing cash flow and covering operating expenses.

Retailers, for example, can utilize inventory loans to purchase stock, freeing up working capital for other needs, such as diversifying their product lines or entering new markets. Small and mid-sized businesses have also utilized asset-based lending with valuable physical assets experiencing growth, meeting short-term cash flow requirements, and continuing their expansion.

The application process for asset-based loans

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With a clear understanding of asset-based loans and their value, the next step is the application process. It begins with evaluating financial needs and gathering necessary documentation, followed by engaging in discussions with a loan representative before receiving a decision.

This process should be undertaken after careful consideration. 

Ensure the capital will be used for its intended purpose, the repayment terms align with your cash flow, and the precise funding required is well-calculated. The borrowing base, which defines the credit limit available to the business, is determined by appraising the company’s assets, including cash, securities, accounts receivable, inventory, real estate, and equipment.

Documenting your company's assets

The first step in the application process is documenting your company’s assets. A balance sheet listing these assets must be provided during the asset-based loan application process. Lenders determine the borrowing capacity by appraising the company’s assets.

During this process, it is crucial for companies to offer unencumbered collateral to facilitate smooth approval of the asset-based loan. Accurate, timely market data, adherence to regulations, and the use of new tools can significantly improve the process of managing collateral for asset-based lending.

Navigating the credit approval process

Credit approval is an essential part of the application process. The good news is that ABL lenders are generally more flexible and patient due to reliance on collateral for loan exposure, leading to less restrictive covenant structures.

This flexibility provides businesses the breathing room they need during the application process, making asset-based lending a more accessible financing option.

Securing your loan with the right collateral

With the application process underway, securing your loan with the right collateral is the next crucial step. The loan-to-value (LTV) ratio is a critical factor lenders use to determine the funding amount for an asset-based loan, representing the loan amount offered as a percentage of the collateral’s assessed value.

Strategic inventory choices can offer more favorable terms for asset-based loans for retailers. By using purchased inventory as collateral, retailers can secure the funds they need to prepare for the high-demand seasons

Managing your asset-based loan effectively

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Getting an asset-based loan is only half the battle; managing it effectively is equally important. Aligning the use of funds with the company’s strategic business goals ensures that the loan contributes positively to business growth. Accurate financial record-keeping supports loan utilization tracking and maintains transparency with lenders.

Open communication with lenders facilitates better management of asset-based loans, providing opportunities to negotiate terms and ensuring compliance with loan agreements.

Monitoring collateral values and loan terms

One key aspect of managing your asset-based loan effectively is monitoring collateral values and loan terms. Regularly monitoring collateral value is crucial as it directly affects the borrowing base and adherence to loan terms. For borrowers, maintaining an up-to-date valuation of collateral can be crucial for negotiating favorable loan terms and securing ongoing access to credit.

Asset-based lending requires monthly reporting on the status of assets and may involve field examinations and appraisals to maintain accurate valuations. Certain types of collateral, like precious metals and shares of listed companies, can have their value monitored regularly from market sources for margin calls, while others like real estate may be revalued less frequently.

Utilizing funds for strategic business purposes

The funds obtained from asset-based loans should be allocated to strategic growth initiatives rather than day-to-day operations. One example is a move to hybrid or remote working to boost productivity

These strategic initiatives could include entering new markets and expanding product lines. Such strategic investments are designed to enhance the long-term financial well-being of the company and are in line with achieving significant business milestones.

Preparing for repayment and avoiding pitfalls

Even as you utilize the funds, it’s crucial to prepare for repayment. Creating a clear repayment plan for asset-based loans is crucial to account for potential asset value fluctuations and maintain good standing with lenders.

Repayment of asset-based loans typically occurs when customers make payments, converting the underlying assets, such as accounts receivable, into cash.

Success stories: asset-based lending in action

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Asset-based lending has proven to enhance financial stability and trigger growth for multiple businesses from diverse industries, thanks to the support of asset based lenders and their asset based lending solutions. Some success stories include how asset based lending work:

  • A tech company leveraging their intellectual property and accounts receivable to invest in R&D
  • A distribution company using asset-based lending against their inventory to stabilize operations during a cash crunch
  • An apparel retailer using asset-based lending to stock up before the holiday season

The success stories are endless, and nothing speaks louder than success.

Case study: manufacturing company's expansion

Consider the case of a manufacturing firm that implemented a strategic expansion plan to grow the business. The firm capitalized on asset-based lending to finance the expansion, using the funds to purchase new equipment. This enabled the company to meet growing customer demand, highlighting the power of asset-based lending to fuel business expansion.

How retail businesses leverage inventory for loans

Retail businesses, too, have successfully harnessed the power of asset-based lending. They have used inventory-based lending to obtain credit lines for addressing seasonal demand, enabling them to:

  • Gear up for high-demand seasons and ensure stock availability
  • Finance significant stock purchases ahead of peak seasons
  • Capitalize on new trends
  • Take advantage of bulk discount offers provided by suppliers

These inventory loans have proven particularly useful for small business owners in the retail sector.

The result? High levels of customer satisfaction and loyalty, crucial for sustaining a competitive edge in the retail market.

Innovations in asset-based lending

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The realm of asset-based lending isn’t static; it’s constantly evolving, with innovations making it more efficient and adaptable. Recent advancements include the adoption of technology-driven appraisal processes and the development of more dynamic credit products catering to the changing needs of diverse business models.

These innovations have significantly expanded its applicability and efficiency in the modern business environment.


In conclusion, asset-based lending offers a flexible, strategic financing alternative for businesses. From understanding what constitutes an asset-based loan to learning how to manage it effectively, this powerful financial tool can help businesses unlock growth opportunities. With numerous success stories and ongoing innovations, asset-based lending remains a viable financing option for businesses looking to leverage their assets for growth.

Frequently Asked Questions

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Drew Moffitt

Drew leads marketing at Kumospace. Prior to joining Kumospace, he spent his career founding and operating businesses. His work has been featured in over 50 publications. Outside of work, Drew is an avid skier and sailor. A wholehearted extrovert, he organizes VentureSails, a series of networking events for founders and tech investors.

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