How Asset Backed Lending Can Boost Cash Flow
If you’re looking to grow your business, manage cash flow, or fund new opportunities, asset backed lending could be the key. It allows you to release the value tied up in your existing assets, turning them into a powerful tool for securing finance.
Instead of relying solely on profitability or credit history, asset backed lending focuses on the strength of what your business already owns. Whether that’s property, equipment, or inventory, your assets can be used to unlock flexible and competitive funding.
What Is Asset Backed Lending?
Asset backed lending (ABL) is a type of finance where a loan or credit facility is secured against one or more of your business assets. These assets might include property, machinery, stock, or even accounts receivable.
The value of your assets determines how much you can borrow. Lenders calculate this using a loan-to-value (LTV) ratio, which measures the loan amount as a percentage of the asset’s worth. Typically, the more liquid an asset is (meaning how quickly it can be sold or converted into cash), the higher the percentage you can borrow.
This type of lending differs from unsecured borrowing, where lenders rely more heavily on your financial history or profit margins. Asset backed lending provides a more inclusive route to finance, particularly for businesses with valuable assets but fluctuating income or limited credit history.
How Does Asset Backed Lending Work?
The process starts with a detailed valuation of your assets. Once the lender assesses their worth and liquidity, they’ll determine how much finance they’re prepared to offer.
You’ll then agree on terms that suit your business needs. Some facilities are structured as term loans, providing a fixed sum to be repaid over time. Others operate as revolving credit facilities, allowing you to draw funds as needed, repay them, and draw again within an agreed limit.
For example, if your business owns machinery valued at £500,000, a lender might be prepared to lend up to 80% of that value, around £400,000. You continue using the equipment as normal, and it remains an essential part of your operations while serving as security for the loan. The amount you can borrow would be subject to underwriting / criteria, so reach out if you would like to explore this further.
Find out Your Options
What Assets Can Be Used as Security?
A wide range of business assets can be used to secure finance. Some examples may include:
- Property: Commercial buildings, offices, or warehouses.
- Equipment and machinery: Useful for manufacturers or construction businesses.
- Vehicles: Fleet assets that hold strong resale value.
- Stock or inventory: Goods that can be easily sold or liquidated.
- Accounts receivable: Outstanding invoices or customer payments.
- Intellectual property: Patents, trademarks, or proprietary technology.
Each lender has its own criteria. Assets that are easy to value and sell generally attract higher funding levels and lower interest rates.
Example of Asset Based Lending
To illustrate, imagine a business seeking a £300,000 loan to expand operations. It pledges marketable securities worth £300,000 as collateral. Because these assets are highly liquid, the lender agrees to provide a loan equal to 80% of their value, £240,000.
If the company instead used equipment or property as security, the loan might be based on 50% of the asset’s value. This difference highlights why liquidity is such a crucial factor in determining how much you can borrow.
Benefits of Asset Backed Lending
Asset backed lending offers several advantages that make it an attractive choice for many businesses.
Access to Higher Levels of Funding
Because lending is secured, lenders are often willing to provide larger sums than with unsecured loans. This can support significant growth, acquisitions, or investments.
Flexibility in Use
You have greater freedom to decide how to use the funds, whether for expansion, debt consolidation, or working capital.
Speed and Efficiency
Once assets are valued and approved, funds can be released quickly, often within a few weeks. This speed can be crucial when time-sensitive opportunities arise.
Control and Ownership
Unlike raising capital through investors, you retain complete control of your business. There’s no dilution of equity or loss of decision-making power.
Improved Cash Flow
By leveraging existing assets, you can smooth out cash flow issues and maintain consistent liquidity, even during slower trading periods.
Risks of Asset Backed Lending
While the benefits are clear, it’s important to understand the potential risks before proceeding.
Risk of Losing Assets
If repayments aren’t made, the lender can seize the asset used as security and sell it to recover losses. Losing a key revenue-generating asset can seriously impact your operations.
Over-Leveraging
Borrowing too much against your assets can put pressure on your finances, particularly if income drops unexpectedly.
Additional Fees
Valuation costs, arrangement fees, and charges for early repayment may apply, so it’s vital to review all terms before signing.
Who Can Benefit from Asset Backed Lending?
Asset backed lending is best suited to established businesses with valuable assets and a proven trading history. It’s particularly useful if you:
- Need working capital to manage cash flow
- Are expanding or investing in new equipment
- Want to refinance existing debt
- Are completing an acquisition or management buy-out
Lenders tend to favour businesses that maintain accurate financial records and demonstrate stability.
Conclusion
Asset backed lending offers a flexible and practical way to access finance by using your business assets to secure funding. It can help you unlock value, support growth, and stabilise cash flow without sacrificing control or equity.
However, as with any financial decision, is essential.
If you’re considering asset backed lending or want to explore your financing options, get in touch with Kerr & Watson today.
