Building Your Business What Is Asset-Backed Lending? Asset-backed lending explained in less than four minutes By Anna Baluch Updated on December 31, 2021 Reviewed by Khadija Khartit Reviewed by Khadija Khartit Twitter Website Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board In This Article View All In This Article Definition of Asset-Backed Lending How Asset-Backed Lending Works Pros and Cons Asset-Backed Lending vs. Factoring Photo: MoMo Productions / Getty Images Definition Asset-backed lending refers to a business loan or line of credit secured by a business’s assets. Definition and Example of Asset-Backed Lending In asset-backed lending, a business pledges an asset or assets as collateral in exchange for a loan or line of credit. The loan may be secured by a variety of assets, such as accounts receivable, equipment, inventory, or commercial property. Let’s say you run a manufacturing business. You need a loan to cover payroll expenses, but you don’t have a lot of cash on hand and find it challenging to get approved for traditional business loans. After you do some research, you find a lender that offers asset-backed lending to similar businesses in your situation. You decide to move forward with this option and borrow money against your manufacturing equipment. By using your physical assets as collateral, you receive the funds you need. Alternate name: Asset-based lending, asset-based loansAcronym: ABL Note A lender that offers asset-backed lending may not provide funding for specialized assets like custom-made inventory. How Asset-Backed Lending Works Asset-based lending can be a loan or line of credit issued by a lender to a business. It can assist with working capital, debt refinancing, seasonal sales fluctuations, mergers, acquisitions, restructurings, and a variety of business needs. While some lenders require one asset to secure a loan or line of credit, others may consider a combination of multiple assets. The value and quality of your inventory, equipment, or other collateral will determine the amount you’ll be able to borrow. Most lenders will allow you to borrow anywhere from 60% to 90% of your asset’s value. Note Lenders typically have a series of requirements for borrowers that go beyond just the assets you provide. In many cases, you’ll need to meet minimums for sales or accounts receivables that might make it difficult for startups to get funding. If your business has difficulty qualifying for a loan because of bad credit or limited financial history, asset-backed lending can give you the chance to borrow money through your assets. While many types of businesses may be able to benefit from asset-backed lending, this form of financing is widely used by manufacturers, distributors, or wholesalers, and other businesses that are heavy in property, plant, and equipment (P&E), in inventory, and in accounts receivable (but thin in margins and/or over-leveraged), Asset-based lending is a particularly good option for businesses that are seasonal, growing quickly, trying to meet a production budget, or in the ownership transition phase, and it offers far bigger financing amounts than small business credit cards. Pros and Cons of Asset-Backed Lending Pros Fast approval times Flexibility for loan use Improved cash flow Cons Asset seizure Initial costs may be high Pros Explained Fast approval times: Compared to traditional bank loans, you can get approved for an asset-based loan fairly quickly. Flexibility for loan use: If you take out an asset-based loan, you may use the fund for just about anything. Improved cash flow: You'll be able to improve your cash flow and smooth out seasonal peaks and valleys. Cons Explained Asset seizure: Per the terms of your loan, your lender can seize the asset you offer for the loan if you default on your payments. Initial costs may be high: An asset-based loan’s early fees can cost more than a traditional loan due to origination and administration costs. Asset-Backed Lending vs. Factoring Also known as “accounts receivable financing,” factoring is a cash advance on your business’s outstanding invoices. It’s essentially a type of asset-backed lending, because accounts receivable act as collateral and help secure funding from a lender. Unlike asset-backed lending, however, there are no monthly payments with factoring. The lender pays you your invoices in advance, usually subtracting a service fee. When your customers pay their invoice, the payment goes to the lender. You’ll find that factoring companies usually only offer accounts receivable financing. Therefore, if you want to pledge an asset like equipment or inventory, they won’t be able to help you. Key Takeaways Asset-backed lending is a business loan or line of credit that is secured by some form of collateral.The most common types of collateral used in asset-based lending are equipment, inventory, and accounts receivable. It can support businesses in all types of industries with working capital, debt refinancing, seasonal fluctuations, mergers, acquisitions, and restructurings. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources 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. Northpoint Commercial Finance. "Asset-Based Lending." Accessed July 9, 2021.