How Asset-Based Loan Financing Works

Get Access to More Working Capital

Smiling couple shaking hands with a lender across a desk with paperwork
Photo: FG Trade / Getty Images

Asset-based loan financing uses a company's assets as collateral when the company gets a loan from a lender. This decision is typically reached by the company when it needs more working capital for expansion purposes.

The lender's interest is secured by the assets of the borrower in all asset-based loans (ABLs), which also determines how large a loan a company can access. But many of the asset-based lenders want a company with a stable balance sheet with strong assets.

Key Takeaways

  • An asset-based loan (ABL) is a business loan that allows a company to pledge its assets as collateral.
  • ABLs can be obtained relatively quickly because their lending processes are less complicated, and they can come with fewer restrictions than other loans.
  • These loans can provide cash flow in tough economic times.
  • Asset-based loan financing is a good way for a company to raise capital when it wants to stay free of debts and keep the company's borrowing options open.

Who Uses Asset-Based Loans?

Many companies have to cope with financial struggles during economic crises. Unsecured loans have therefore become hard to come by because many financial institutions aren't willing to extend these loans and take on the risk of not being repaid. Numerous companies have decided to use their assets as collateral for lenders in this case, resorting to asset-based loan financing.

These loans are usually advisable whenever a company needs working capital to keep all its normal business activities running. The company opts to use its own assets to get financial assistance from lenders. The company's assets are used as collateral.

What Determines How Much a Company Gets?

Not all companies can be given loans of the same size. Sometimes the amount that a company applies for may not be given by the lender due to certain rules that guide the lending process. A company is generally allowed to borrow between 70% and 90% of the value of the company's account receivables. A company can qualify for a loan that's equal to 50% of the value of the inventory when inventory is used as collateral.

What Is the Cost?

The cost of these loans depends on the value of the collateral that's used and the amount of the loan given, as well as the general risk involved.


The cost of the loan is often priced based on the current annual percentage rate (APR).

What's the Due Diligence Process for the Loan?

A lender must conduct research about the company's financial status and the type of collateral being used, as well as go through the company's financial books, before it will agree to provide a loan to any given company.

What Are the Benefits of an ABL?

The ABLs are very beneficial to a company in several ways.

They Can Be Obtained Quickly

Unlike other conventional loans that require a lot of documentation, ABLs are easy to obtain without a lot of hassle for as long as the company meets the lending criteria.

They Provide Financial Stability

These loans can cushion a company that's going through hard economic times and quickly restore it to a stable financial state. They're given within a short period of time so as to increase the company's cash flow.

They're Easier to Get Than Other Types of Loans

Realistically, it's easier to qualify for an ABL loan compared to other lines of credit because very few processes are involved. But the financial position of the company and the value of the collateral used must be considered.

Their Restrictions Are More Flexible

Asset-based loans are very flexible when it comes to how the company spends the money. An ABL doesn't come with strings attached like other loan forms.

Frequently Asked Questions (FAQs)

What kinds of companies can qualify for ABL loans?

Both small- and large-sized companies can qualify for ABL loans. These include wholesalers, retailers, distributors, and even service providers. But they generally need a strong balance sheet, and they need sufficient assets to pledge as collateral.

What can a company use as collateral for an asset-based loan?

Many lenders prefer to take accounts receivable as the main collateral. But a company can still use its equipment, machinery, real estate, and inventory if necessary.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Bank. "Can ABL Options Fuel Your Business—And Keep It Running?"

  2. U.S. Small Business Administration. "Asset-Based Lending: What Is the Upside and Downside?"

Related Articles