Asset-based lending: borrow against receivables, stock, machinery or property

Asset-based lending uses assets already on the business balance sheet as security for borrowing. Unlike a simple term loan based mainly on earnings and credit history, the amount available can depend heavily on the value, liquidity and eligibility of receivables, inventory, equipment or property.

The borrowing base starts with assets the lender can value and realise

The British Business Bank says asset-based lenders can consider accounts receivable, inventory, property, industrial equipment and other assets. The more easily an asset can be converted into cash after default, the more attractive it usually is as collateral.

A £4 million warehouse, £3 million of trade receivables and £2 million of stock are not all treated equally. The lender can apply different eligibility rules and advance rates to each pool. Management should therefore ask which assets actually count rather than assuming the balance-sheet value equals borrowing capacity.

Loan-to-value and advance rates determine usable headroom

British Business Bank guidance explains that lenders use loan-to-value or advance-rate calculations to decide how much they will lend against assets. It gives the example that inventory finance may be limited to around 50 percent of inventory value, although real terms vary.

Receivables can also be discounted for age, customer concentration, disputes or foreign location. A borrowing base that shows £5 million this month can fall quickly if large invoices become overdue. Treasury should monitor available headroom, not just the headline facility limit.

Expect regular borrowing-base certificates and asset reporting

Asset-based lending usually requires more operational reporting than an unsecured loan. The lender can ask for debtor ageing, stock reports, valuations, customer concentration, insurance and covenant information. Accurate accounting systems therefore become part of the finance infrastructure.

If the company cannot produce reliable inventory counts or customer-ageing data, the lender may reduce eligibility or require more controls. Build reporting ownership before drawing the facility. The finance team should be able to reproduce the borrowing-base calculation rather than relying entirely on the lender's portal.

The assets are security, so default has real operational consequences

The lender can take security over the relevant assets and may register charges at Companies House. If the company defaults, those assets can be at risk. Borrowing against machinery or property can therefore affect the business's ability to operate, not only its balance sheet.

Review existing debentures and negative pledges before offering the same assets to a new lender. Another bank may already hold fixed or floating security. The legal advisers should confirm priority and consent rather than finance assuming that an asset shown as owned is automatically free to pledge.

Compare monitoring fees and valuation costs as well as the interest margin

Asset-based facilities can include appraisal, audit, monitoring, valuation and legal fees in addition to interest. A lower headline rate can therefore be less important than the all-in cost of maintaining the facility.

Model utilisation. A £5 million facility with substantial fixed fees can be expensive if the business normally draws only £500,000. Conversely, a company that can use the facility to replace a persistent high-cost overdraft may obtain better liquidity and pricing despite the administrative work.

Asset-based lending works best where the asset base is strong and data is reliable

British Business Bank notes that asset-based lenders assess trading history, financial performance and the type and value of assets. The product can suit established businesses with substantial receivables, inventory, property or equipment that are not fully reflected in a conventional cash-flow lending decision.

Prepare clean accounts, asset registers, debtor ageing and inventory information before approaching lenders. The company should also stress-test what happens if receivables slow or stock values fall. The facility is only dependable working capital if the collateral base remains strong enough to support it.

Build a downside borrowing-base scenario before relying on the facility for payroll. If receivables availability falls from 85 percent to 70 percent because major invoices become overdue and inventory eligibility falls after seasonal stock ages, the undrawn headroom can disappear quickly. Management should know how much borrowing remains under a stressed asset base, not only under today's clean month-end report.

Asset valuations also need ownership discipline. Inventory held on consignment, receivables subject to set-off, or equipment already financed elsewhere may be excluded even though they appear on operational reports. Reconcile lender-eligible assets to the statutory and management accounts so treasury understands why a £10 million asset base may support materially less than £10 million of borrowing.