Asset-Based Lending: How It Works and When It Makes Sense

What asset-based lending is

An asset-based loan is secured by specific business assets. The lender advances a percentage of their value and takes a lien on them until you repay.

Most small business loans lean on cash flow and credit. Asset-based lending leans on collateral. The lender looks at what the company owns that can be sold or collected, then lends against a share of it.

Common collateral includes unpaid customer invoices, finished goods and raw materials, machinery and vehicles. The loan is often structured as a revolving line, so you borrow more as assets grow and repay as they convert to cash.

Because the lender can claim the pledged assets if you default, it will usually check their condition and value before it commits. Read our explainer on what a lien is to see what that claim means in practice.

The borrowing base explained

The borrowing base is the maximum a lender will advance, calculated by applying an advance rate to each eligible asset. It changes as your assets change.

Lenders do not lend against the full value of every asset. They discount for risk. Receivables more than 90 days old, for example, are often excluded, and inventory that sells slowly is valued lower than inventory that moves quickly.

Here is an illustrative example. Say a distributor has $300,000 in eligible receivables and $200,000 in saleable inventory. If the lender advances 80% on receivables and 50% on inventory, the borrowing base is $240,000 plus $100,000, or $340,000. If receivables drop, so does the amount available.

Expect to send regular reports, often monthly or weekly, so the lender can update the base. That reporting is part of the cost of this product.

Which businesses use it

Asset-based lending fits companies that hold large receivables or inventory, such as wholesalers, manufacturers, distributors and staffing firms. It also helps businesses with thin or uneven profit.

A business that grows quickly often ties up cash in stock and unpaid invoices. A borrowing base grows with it, which can give more room than a fixed loan sized to last year's results.

It is also used by companies that have had a rough year on paper but still hold solid assets. Strong collateral can offset weaker earnings.

It is less useful for service businesses with few physical assets and no large invoices, since there is little to borrow against.

What it costs and what to watch for

Cost includes interest plus fees for setup, audits, unused lines and monitoring. The reporting and audit burden is a real cost of its own.

Compare offers on total cost, not only the rate. Ask about:

• Origination and closing fees
• Field exams or collateral audits, and who pays for them
• Unused line fees and minimum usage requirements
• Collection or lockbox arrangements that route customer payments to the lender
• Early termination penalties

Our guide to the total cost of a funding offer shows how to line these up side by side. Also read about cross-collateralization so you know whether one asset may secure more than one obligation.

How it compares with other financing

Asset-based lending is more flexible on credit and earnings than a bank term loan, but it carries more reporting than a simple line of credit or working capital product.

A traditional term loan gives a lump sum and fixed payments, with approval tied to profit history. A business line of credit gives a revolving limit, usually without asset-level reporting. Working capital products rely mostly on revenue and bank statements.

If your assets are strong but paperwork heavy, asset-based lending can give a larger limit. If you want speed and simplicity, a revenue-based product is usually easier to start.

Is a ROI Funder product a closer fit?

ROI Funder does not place asset-based lines or accounts receivable financing. Working capital, a line of credit or equipment financing may fit if your revenue is steady.

ROI Funder places working capital, revenue-based financing, term loans, lines of credit, equipment financing and SBA loans. It does not place asset-based lines. If you need a facility built on a borrowing base of receivables and inventory, that is a different product.

If your business has 6+ months of history, $20,000+ in monthly revenue and 500+ FICO, a working capital option may cover the same cash gap with a shorter application: the application plus 3 months of bank statements. Applying uses a soft credit pull and carries no obligation.