Asset-based lending is one of those tricky business finance terms that can mean a few different things. Generally, it means either the specific type of finance called asset-based lending (ABL), or asset finance, a more general category of various finance types.
Let’s take a closer look at asset-based lending and asset finance, and unpick some of the terminology that lenders use.
Often, ‘asset-based lending’ is used as a synonym for asset finance, which is a broad category of funding focused on assets. You may also hear it called ‘asset-backed’ or ‘secured’ lending — what they all have in common is a focus on the valuable items your business owns.
The classic example of asset finance would be getting a loan based on the value of commercial property, machinery, or vehicles. Let’s say your business owned a CNC milling machine worth £10,000 — with this kind of asset to use as security, lenders may be willing to lend between £5,000 and £7,500 (i.e. 50 per cent to 75 per cent of the resale value).
The asset is called ‘security’ because the lender has the right to sell the item in the event that your business can’t repay the loan. That means that asset finance is often cheaper than ‘unsecured’ funding, because the lender has the reassurance that the loan is backed up by something tangible and therefore takes on a lower risk.
It’s important to note that not all assets are considered for asset finance. Items that depreciate a lot like vehicles are more difficult to use as security, and lenders will usually want the assets to be central to your business activities. In a nutshell, it generally needs to be something that holds value well, and the lender wants to know that you’ll do everything you can not to lose it.
There is another side to asset finance worth mentioning, which is focused on getting new assets — usually via an equipment leasing or hire purchase agreement — but these products are less relevant to our purposes here.
Although the terms sound similar, asset-based lending is a bit different to asset finance. Also known as ABL for short, it’s a specific type of lending rather than a general category like asset finance.
With asset-based lending, the amount you can borrow is based on your whole balance sheet, rather than specific individual assets, which means it’s suitable for larger companies that want to raise significant capital for growth. The most common scenario is a structured combination of invoice finance and a business loan, which provides a lump sum for growth as well as more regular cash flow funding.
Another key difference of asset-based lending is that the type of assets considered is wider. Asset finance is concerned with ‘hard assets’, things like property and machinery, whereas ABL lenders consider various other assets such as accounts receivable (i.e. invoices) and stock. Because asset-based lending uses a wider base of assets, many businesses find they can raise more cash than with straightforward asset finance.
It also means that with ABL, lenders are often less interested in specific assets, and it’s more about the overall picture of your business. An asset finance lender might want the serial number of a forklift in your warehouse, while an ABL lender might only need to look at it on your balance sheet.
The best way to think of asset-based lending is that it releases cash from your entire balance sheet, whereas asset finance releases cash from a specific item. Depending on what your business does, ABL might involve commercial property, machinery, vehicles, invoices, and stock — and the amount you can borrow is based on all of these things combined.
Asset-based lending can be more flexible than standard business loans or overdrafts, and the amount of funding available scales with your business as a whole. That makes ABL a good fit for established businesses looking to grow steadily over the medium term.
Conrad Ford is chief executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016.
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