A less well-known source of debt finance is asset-based lending, where financiers can lend your business money using your assets as collateral. Asset-based lending is a secured business loan where the borrower pledges their assets as collateral. Financiers lend on assets with high sell-on values: stock, machinery, premises, invoices and even brands or trademarks. It is distinct from invoice discounting, as invoices make up only part of the arrangement. Typically you will have access to a revolving credit facility (where you have an upper limit but the total borrowed changes frequently), as with an overdraft. The size of the facility is subject to the value of collateral at the time, and is constantly assessed, so the borrowing ability of a seasonal business can fluctuate.
Financiers usually retain legal ownership of the assets concerned for the contract’s duration. Unlike bank lending, where future cash projections are a major consideration in the lending decision, asset financiers base decisions on the value of specific assets.
In Brief: Asset based Lending
- Debt can be secured against assets including stock, machinery, premises, invoices and even brands
- Manufacturers, distributors and retailers are the most likely users, though it’s not a common source of UK finance and few finance houses specialise in it
- Ownership of assets is gained or retained by the lender for the duration of a contract
- Lenders may advance more than invoice discounters because they look at all the assets of the company
- Some lenders have a minimum deal size of £5m