Asset Based Lending

As a small business owner you have many business ideas for growth and you see opportunity everywhere, but traditional loans look impossible. Did you know that banks are not willing to lend money to small businesses due to their poor credit histories? In fact, according to Fundera recent studies, 56% of small businesses apply for business loans, with a rejection rate of 9% by traditional lenders each year. Banks are afraid to lend money to you because your credit history is not so good and now you feel like your dreams are stuck.

But wait! Asset based lending is the only option that will help you in this situation. In this blog, we will explore the ins and outs of asset based lending for SMEs, providing you with valuable insights into how this loan option works and how it can benefit your business.

Introduction to Asset Based Lending

Asset based lending is a type of financing for businesses in which the borrower assets, like real estate, equipment, and inventory are used as collateral for a loan. It is important in the financial sector since it makes cash accessible based on asset value rather than creditworthiness, particularly for small businesses.

As compared to traditional lending, asset based lending places a higher value on the quality of collateral compared to traditional lending, asset based lending places a higher value on the quality of the collateral than the credit history of the borrower. This makes it a practical choice for companies whose revenue is unstable or whose credit is difficult to obtain finance.

Assets including real estate, machinery, inventory, and accounts receivable are frequently utilized as collateral in these transactions. These assets give the lender security, enabling companies to get capital for expansion and successfully controlling risks involved with business loans.

How Asset Based lending Works

Asset-based lending (ABL) is a financing method where a business secures a loan using its assets as collateral. To obtain an asset-based loan, a business needs to provide a list of its assets, such as accounts receivable, inventory, or equipment, which are then evaluated by the lender to determine their value.

When calculating the loan amount in asset based lending, collateral valuation is an important consideration. To figure out how much they are willing to lend, lenders consider the collateral security and availability. By ensuring that the borrower has enough assets to secure the loan, this valuation helps the lender reduce risk.

One important ABL indicator that defines the percentage of the assets usefulness that can be borrowed is the Loan-to-worth (LTV) ratio. While a larger ratio can suggest greater danger, a lower LTV ratio suggests a lower risk for the lender. LTV ratio has a significant impact on the quantity and terms that a business can borrow when it comes to SME loans and business loans.

Types of Assets Used in Asset-Based Lending for SME Loans

Asset-based lending is a financing approach that helps small and medium-sized businesses (SMEs) by using different kinds of assets as collateral to get business loans.

Here’s a breakdown of key asset types used in asset based lending for SME loans:

Inventory: Businesses can use their belongings as collateral for asset-based lending, which makes inventory a valuable asset. Although this can offer liquidity, there are several issues that must be properly managed, like variations in the value of the products and their ability to last.

Accounts Receivable: Accounts receivable financing is important for asset based lending. This type of funding helps SMEs in successfully fulfilling their business needs.

Equipment and Machinery: Important assets that can be used as collateral in ABL transactions are machinery and equipment. Businesses may get loans for working capital, improvements, or growth by promising these assets; the value of the equipment decides the loan amount.

Real Estate: Real estate assets, including land or buildings, can be used to secure loans. Businesses that own real estate might use the value in these assets to get better terms from money lenders or receive larger loans.

Advantages and Disadvantages of Asset-Based Lending


Flexible Financing: SMEs can access cash more easily using asset-based lending, which lets them change loan amounts in accordance with their current needs.
Higher Borrowing Limits: By leveraging the value of their assets, SMEs can often secure larger loan amounts than they would through traditional financing methods.
Improved Cash Flow Management: SME cash flow changes can be better managed with a revolving line of credit, guaranteeing funds availability when needed.


    Higher Interest Rates: Asset-based loans may come with higher interest rates compared to traditional loans, reflecting the increased risk for lenders.

    Stricter Repayment Terms: Lenders may impose stricter repayment terms and covenants to mitigate their risk, potentially limiting SMEs’ financial flexibility.

    Unlock Your Business Growth Now! Explore Asset Based Lending For SMEs

    Contact Us

    Eligibility and Creditworthiness for Asset Based Lending

    In order to be eligible for asset based lending borrowers must fulfill certain requirements. To assess creditworthiness, lenders usually look at the borrower’s assets, collateral, and financial situation.

    Eligibility Criteria for Asset-Based Lending:

    Collateral: To secure the loan, borrowers have to offer valuable assets including real estate, equipment, inventory, and accounts receivable.

    Financial Stability: Lenders assess the borrower’s financial health, including revenue, profitability, and cash flow projections.

    Industry Experience: Borrowers with relevant industry expertise and a track record of success are more likely to qualify for asset-based loans.

    Credit History: While credit scores may be considered, lenders focus more on the value and quality of the collateral provided.

    Creditworthiness Assessment :

    Collateral Valuation: Lenders conduct thorough assessments of the collateral’s value to ensure it covers the loan amount in case of default.

    Financial Analysis: Lenders review the borrower’s financial statements, tax returns, and cash flow projections to check repayment capacity.

    Required Research: Lenders carry out a thorough research process in order to confirm the borrower’s information and assess any possible risks.

    How to Choose the Right Asset-Based Lender for SMEs

    Selecting the right asset-based lender is important for SMEs looking for loans. Here are some factors to consider when choosing lenders:

    Experience and Reputation: Always Look for lenders with a proven track record of providing SME loans and a reputation for reliability and transparency.

    Interest Rates and Fees: Compare the interest rates, fees, and other charges associated with different lenders to ensure you’re getting the most competitive terms.

    Customer Service and Support: Choose a lender that offers customer service and support, understanding your business unique needs and challenges.

    Flexibility and Customization: look out lenders who offer flexible terms and provide customized solutions to your specific industry and borrowing requirements.

    Transparency and Communication: lenders who are transparent about their lending criteria, processes, and terms, and who communicate openly throughout the loan lifecycle.

    Asset Based Lending EndNote

    For SMEs considering asset-based lending, it is important to carefully evaluate their assets, understand the terms and conditions of the loan, and choose the right lender. While asset based lenders offer many benefits, including flexibility, and faster access to funds, SMEs must also be aware of the potential risks and challenges, such as higher interest rates.

    As SMEs create jobs, and contribute to economic development, asset based lending stands as an effective tool to support their journey towards achieving their goals. In today’s changing business environment, SMEs can survive by facing challenges, and forming partnerships with the right people and resources.