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Asset Based Lending | Everything You Need To Know
For many businesses, asset-based lending is the best solution for capital needs. But what does an asset-based secured loan actually entail? At Clifton Private Finance, we have the answers.
Written by: Sam Hodgson
What is Asset-Based Lending?
Asset-based lending, or asset-based loans, are a secured business loan where an asset is tied to the loan as collateral, also called a guarantee.
Like most loans, interest is accrued on an asset-based loan, and monthly payments are made to the lender until the loan is repaid.
While an asset is linked to a loan it remains the property of the business, but limitations are placed on its use - the main one being that it cannot be sold without initiating a repayment in full of the loan.
Asset-based loans, therefore, are a risk to the borrower, where failure to make the agreed payments can lead to the loss of the linked asset.
However, with the risk somewhat limited due to the collateral, asset-based lending typically offers financial benefits, such as higher-value loans, lower interest rates, and longer repayment terms.
This is what sets asset-based lending apart from other business finance options.
And while you're here, if you want to speak to a specialist about your options - whether that's asset-based lending or any other type of business loan - you can book a free consultation below.
We are a whole of market brokerage, so we compare finance options from a range of lenders to find the best rates and terms for our clients.
Contents
Asset-Based Finance Loan to Value
The 3 Types of Asset-Based Finance
Asset-Based Finance to Purchase Assets
Asset-Based Finance vs. Unsecured Loans
What are Asset-Based Loans Used For?
5 Alternatives to Asset-Based Finance
Asset-Based Finance with Clifton Private Finance
What Are ‘Assets’?
In broad terms, an asset is anything owned by the company that has value and can be sold for that value to provide security on the loan.
However, in real terms, lenders look for a list of specific assets that are considered acceptable.
While this list is not exhaustive, it represents the most common assets that can be used to secure asset-based lending. In each situation, should a business want to have another asset considered, this can be discussed with the lender or finance broker.
Viable assets include:
- Property - One of the most tangible assets a company can have is property. Commercial buildings and land are considered strong collateral for a loan.
- Vehicles - Though vehicles can depreciate rapidly over time, company cars, vans, and tractors all represent tangible assets.
- Machinery and Equipment - The range of equipment accepted by finance companies as guarantees for an asset-based loan is wide, from specialist medical equipment, factory machinery, and computer technology.
- Furniture - Many businesses successfully use their office furnishings as assets to offset a secured loan.
- Together, the grouping of these tangible, physical assets is often called PP&E or Property, Plant, and Equipment. They are known as fixed assets and are able to be considered to secure long-term asset-based lending.
- Raw Materials - Businesses that create products for sale will have an inventory of raw materials that can be used as collateral.
- Works in Progress - Despite being unfinished, WiP are another asset that forms part of a business inventory.
- Stock - Finished goods that are available for sale are considered stock, forming a third section of inventory that can be used to secure asset-based lending.
- The above group represents a type of asset known as tangible current assets. This inventory is typically used to secure shorter-term asset-based loans, with more flexible terms that allow for the continued use and sale of the assets.
- Accounts Receivable - The value of outstanding invoices owed to the business. See Invoice Finance.
- Merchant Cash - Future sales through established card transaction machines. See Merchant Cash Advances.
Read blog: Government Start Up Loans
These assets represent intangible current assets, a group of assets that is used for specific niche asset-based lending options, invoice finance and merchant cash advances.
These systems allow the use of known future income to serve as collateral for the asset-based finance.
Asset-Based Lending Examples
Read some of our asset-based lending case studies below for some examples of how asset-based finance works in practice:
How Much Could You Borrow?
Use our business loan calculator below to see what you could borrow.
Asset-Based Lending Loan to Value
A concept that needs a clear understanding of for asset-based lending is that of LTV, or Loan to Value. LTV is expressed as a percentage and shows how much capital can be raised against the agreed value of the assets.
For example, a 90% LTV loan against an asset worth £1m, would be a loan of £900k.
Most asset-based loans will be offered in a range from 60% LTV through to 90% LTV.
Higher LTV loans provide greater amounts of capital to the business but may come with more significant interest rates.
A lower LTV loan is likelier to be easier to manage, however, failure to make repayments puts significantly more valuable assets at risk of repossession.
The type of asset will be the most significant factor in the LTV offered.
Loan to Value (LTV) Examples
|
Asset |
Asset Value |
Loan Type |
LTV |
Loan Total |
|
Computer Equipment |
£300,000 |
Long-Term Secured Loan |
65% |
£195,000 |
|
Shop Stock |
£250,000 |
Short-Term Secured Loan |
75% |
£187,500 |
|
Property |
£400,000 |
Long-Term Commercial Mortgage |
90% |
£360,000 |
|
Accounts Receivable |
£100,000 |
Short-Term Invoice Finance |
80% |
£80,000 |
The 3 Types of Asset-Based Lending
Not all asset-based finance takes the same form. The following are three of the main types of asset-based lending:
Loan with Capital Repayment
The most common type of asset-based loan is one where the repayments are used to repay the loan in full. Each regular repayment (typically monthly) pays back the interest accrued in that period as well as repaying a portion of the initial loan value (the principal).
Once the 60 payments have been made, the asset-based loan is repaid in full with nothing outstanding and the assets would no longer be tied as collateral.
Interest-Only Loan
An interest-only loan is a viable option when the asset is likely to increase in value over the term with plans to liquidate it at the end. Interest-only loans are often used for property purchase.
If the asset has appreciated in value, then this can be sold to repay the principal while generating profit for the business.
For example, a £100,000 interest-only asset-based loan at 10% APR over 5 years. Each year, the loan would generate £10,000 in interest (10% of £100,000 with no change in the principal). Each month, the repayments would be £833.33 (£10,000 / 12). At the end of 60 months, £50,000 would have been paid in interest and £100,000 will still be owed.
If the asset has increased in value by 60% in this time, it can be sold for £160,000. That money can be used to repay the loan principal, leaving £60,000 profit. Even considering the amount paid in interest over the five years, the business is still £10,000 better off - plus it has enjoyed five years using the asset.
Interest-only asset-based lending can be seen as similar to a rental process, as monthly payments are made for the use of the asset during the term and the asset relinquished at the end of the term.
Of course, should the asset depreciate in value or suffer damage during the term, an interest-only loan can be costly.
Asset-Based Lines of Credit
A third option is for the lender to offer a line-of-credit facility tied to the asset.
Lines of credit allow businesses to ‘dip in and out’ of the credit, paying interest only on the total used. One familiar example of a line of credit system is a credit card.
Asset-based lines of credit include invoice finance and merchant cash advances.
Asset-Based Lending to Purchase Assets
While the use of existing assets to secure an asset-based loan is the simplest form of asset-based lending, many asset-based loans are used to purchase the very asset they are tied to.
But purchasing assets with asset-based lending is not limited to property and mortgages. Many equipment and machinery purchases can be undertaken with linked asset-based loans.
Loan to Value and Deposits
One of the downsides of using the purchased asset as the sole collateral for an asset-based loan is the difference between the loan total and the cost of purchase.
This is because asset-based loans are very rarely 100% LTV, thus there is a need to find the remaining amount to fund the loan from existing capital or other finance options.
This amount is termed the deposit or down payment. It is calculated as the difference between the loan value and asset value, and, as a percentage is the inverse of LTV.
LTV and Deposits
|
Asset Value |
LTV % |
Loan Value |
Deposit % |
Deposit Total |
|
£100,000 |
80% |
£80,000 |
20% |
£20,000 |
|
£250,000 |
75% |
£187,500 |
25% |
£62,500 |
|
£380,000 |
70% |
£266,000 |
30% |
£114,000 |
|
£500,000 |
60% |
£300,000 |
40% |
£200,000 |
Asset-Based Lending vs. Unsecured Loans
The main alternative to asset-based lending is an unsecured business loan.
Surely, the idea of raising the capital without having to secure it with an asset as collateral is a good one? So why are unsecured business loans often inferior to secured asset-based ones?
- Interest Rates - There are a number of factors that go into determining an interest rate, but the largest one is risk. Loans with greater risk have to make more profit for the lender to make that risk worthwhile - profit that typically means a higher rate of interest. By mitigating the risk with an asset-based guarantee, a similar loan can be offered with a lower rate of interest.
- Larger Loans - With assets to use as collateral, lenders are far more willing to lend higher amounts of money. Many loans that are unachievable as unsecured loans are within reach as asset-based lending.
- Application Success - It may simply be that your business doesn’t have the creditworthiness to be granted an unsecured loan. Business credit history plays a large part in unsecured loan assessment that can be offset significantly with an asset-based security.
- Director’s Guarantees - The director’s guarantee is a personal guarantee used to mitigate the risk of an unsecured loan, making you personally liable for the repayments should the business fail. Despite being able to protect yourself against this to an extent with Personal Guarantee Insurance, most asset-based loans do not require this personal guarantee at all, making them a far safer form of business loan.
What are Asset-Based Loans Used For?
Asset-based finance is one of the best ways to raise capital for your business, both for the long and short term. Some of the common uses for an asset-based loan include:
- Covering Cashflow Shortfalls - Cashflow is the lifeblood of any business, and when it is tight, the business can feel strangled. Using a short-term asset-based loan to cover cashflow problems means financial responsibilities are taken care of - salaries are covered, suppliers paid, and the business can breathe.
- Project Investment - Looking to take on new, bigger projects can mean an investment in people and equipment. An asset-based loan can provide the capital needed to move your company to the next stage.
- Obtaining Machinery - Specialist machinery is often outside the budget of many companies, with the latest equipment costing tens, or hundreds of thousands of pounds. Long-term asset-based loans open the door to machinery that enables a greater expanse of work, growing your company.
- Property - Commercial mortgages are a prime example of asset-based lending, allowing you to shift from rented offices and workspace, to company-owned property for long-term investment and security.
Read blog: Small Business Loans UK - 5 Things to Know
5 Alternatives to Asset-Based Lending
While asset-based lending offers businesses access to an injection of funds, it is not the only option available for business owners looking to raise capital. Alternative options include:
Asset-Based Lending with Clifton Private Finance
At Clifton Private Finance, our team of specialists are here to help you obtain the asset-based lending your company needs to grow in the way you want.
From short-term invoice financing through to the very best in low-cost, long-term commercial mortgages, we can help you get the right loan.
As an independent professional business finance broker, we are able to work with the entire funding landscape to find you the asset finance that best suits your business need.
Speak to us today and let us show you how the right asset finance can propel your company forward.
To see what we can do for you, call us on 0203 900 4322 or book a free consultation below.
