Tags: Asset Based Lending, Asset Based Loans, Asset Based Financing, Asset Based Lender, Asset Based Lending Works

Asset-based loans are, as the name implies, loans based on your assets. These assets are generally accounts receivable and inventory that are to be used as collateral. We’ll go into all the ins and outs of asset-based lending to help you determine whether this type of financing solution is the right fit for your small business.

What Is Asset-Based Lending?

Asset-based lending requires the loan to be secured by the assets of the borrower. In other words, these assets are used as collateral to secure the loan. Some examples of assets that can be used to secure a loan include inventory, accounts receivables, PP&E (property, plant, and equipment), and marketable securities.

An asset-based lending company considers an asset-based loan to be less risky than a loan that is unsecured (meaning the loan is not backed by any assets as collateral). The more liquidable the asset, the less risky the loan is considered, often resulting in lower interest rates.

As an example, the asset-based lending company may consider accounts receivable a safer bet than a loan secured by property. The reason behind this being that the property is not as quickly liquidated on the market as the accounts receivable, and it will take longer for the lender to recoup their money if the borrower defaults on the loan.

How Asset-Based Loan Financing Works

Asset-based lending allows a business to secure a loan using assets from their balance sheet pledged as collateral. Many companies choose to use asset-based financing over traditional loans because the loan amount is determined by the value of the assets rather than the creditworthiness of a company. If the company were to default on their loan, the lender would seize the assets used as collateral.

A term commonly referenced in asset-based lending is loan-to-value ratio, which is dependent on the type of asset being pledged as collateral. As an example, the asset-based lending company may state, “the loan-to-value ratio for this asset-based loan is 70% of accounts receivable”. Generally, the more liquid the asset, the higher the loan-to-value ratio will be.

Once the loan is secured, the company can then use this money to boost working capital, purchase equipment, get over a financial hump, and more.

Asset-Based Lending Terms & Structure

There is no “one-size-fits-all” loan package when it comes to asset-based lending, and not every company can be given the same size loan. Generally, a company is allowed to borrow between 70% and 90% of the value of the company’s account receivables. A company may also qualify for a loan that’s equal to 50% of the value of the inventory when inventory is used as collateral.

The final cost of the loan will depend on the value of the pledged collateral and the general risk involved and based on the current annual percentage rate (APR).

Upsides Of Asset-Based Lending

Asset-based loans can provide capital for a business that is rapidly expanding, is in the midst of a turnaround, is undercapitalized or highly leveraged. Sometimes, a business may simply be in need of cash to overcome a financial hardship or to prevent growth from stalling out.
An asset-based loan is a great option for distributors, manufacturers, and service companies with a leveraged balance sheet whose industry cycles and seasonal needs can often restrict their cash flow. Asset-based loans can also be a good option for financing acquisitions.

Downside Of Asset-Based Lending

The chance a business has of securing an asset-based loan is only as good as the value of the receivables. Typically, a commercial lender will look through your customer list to determine which ones have a strong credit rating or which ones pay in 60 days or less. They may not consider sales to small businesses or individuals as eligible receivables.

Interest rates can vary greatly and cost more than traditional loans. A bank may include additional due diligence and audit fees to the overall cost of the asset-based loan. Larger financial institutions may also require a personal guarantee from you and the assumption of your other banking relationships.


A company may not always be given the amount of loan applied for due to certain rules and restrictions that guide the lending process. Shearwater Global is a direct lender, with our funds coming primarily from private investors. As a result, we are not burdened with the regulations that banks and larger financial institutions face and pride ourselves on being flexible to structure deals that meet our client’s needs as much as possible.

Our typical structures are asset-based or limited recourse loans tailored to meet the specific needs of our clients. Utilizing the financed asset as collateral, we can typically close in one to four weeks, depending on the asset. We can also consider convertible debt or Hybrid – Debt /Equity investments. Contact us today to learn more.

Would you like to find out how we can help you obtain a customized financing solution?

Call us, and we will be happy to discuss your requirements.