Introduction

Asset-based lending gives businesses access to capital by using physical or financial assets as collateral, rather than relying primarily on cash flow or credit history. Unlike traditional bank loans that focus on future revenue generation, asset-based lending is based on the current value of what a business owns, including accounts receivable, inventory, equipment, and real estate.

This approach is especially useful for companies that are asset-rich but don’t meet conventional lending criteria. Businesses experiencing rapid growth, seasonal cash flow swings, or working capital constraints may find asset-based lending a more flexible option.

What Is Asset-Based Lending?

Asset-based lending (ABL) is a form of business financing secured by balance sheet assets. The borrower pledges specific assets as collateral, and the lender advances funds based on their appraised value rather than projected cash flows or profitability.

The key difference is in lender focus. Traditional banks emphasize EBITDA, debt ratios, and cash flow projections. Asset-based lenders concentrate on tangible collateral and assess how much value could be recovered if the assets were liquidated.

Most ABL facilities are structured as revolving lines of credit. Borrowing capacity rises or falls with the value of the underlying assets, allowing financing to scale alongside operations.

Types of Assets Used as Collateral

Accounts Receivable

Accounts receivable are the most common and liquid form of ABL collateral. These are unpaid customer invoices expected to be collected within a defined timeframe.

Lenders typically consider receivables less than 90 days old and no more than 60 days past due. They also assess customer credit quality, payment history, and concentration risk if a small number of customers account for a large share of receivables.

Advance rates usually range from 75% to 90% of eligible receivables, reflecting collection risk and timing uncertainty.

Inventory

Inventory financing allows borrowing against raw materials, work-in-progress, and finished goods, though eligibility varies.

Lenders favor inventory that is easily marketable and holds stable value. Generic or commodity goods are preferred, while custom, perishable, or highly specialized inventory may receive lower advance rates or be excluded.

Advance rates generally fall between 50% and 75%. Periodic physical audits confirm inventory existence and condition.

Equipment and Machinery

Equipment such as manufacturing machinery, vehicles, and office technology can also serve as collateral. Key factors include condition, remaining useful life, and resale value.

Standard, well maintained equipment from recognized manufacturers supports higher advance rates. Specialized equipment with limited resale markets typically supports less borrowing capacity.

Real Estate

Commercial real estate can meaningfully increase a borrowing base. Properties such as warehouses, offices, and retail locations are valued through third-party appraisals.

Real estate provides relatively stable collateral, though advance rates depend on property type, location, and market conditions.

Intellectual Property

Intellectual property, including patents and trademarks, may qualify as collateral in limited cases. Valuation is complex, and lenders typically require clear market value and proven revenue linkage.

How Asset-Based Lending Works

The ABL process differs from traditional bank lending and centers on collateral evaluation.

Initial Assessment

The process begins with a review of the company’s financing needs and asset profile. The lender determines whether ABL is appropriate and outlines a potential structure.

Field Examination

Field examinations are a core component of ABL. Lender teams conduct on-site audits to review receivables aging, inventory counts, equipment condition, and payables.

Third-party appraisers may be used for real estate, equipment, or intellectual property. This diligence establishes a reliable collateral baseline.

Borrowing Base Calculation

The borrowing base represents the maximum available credit and is calculated by applying advance rates to eligible assets.

For example, $1 million in receivables at an 85% advance rate and $500,000 in inventory at a 60% rate would result in a borrowing base of $1.15 million.

Loan Structure and Terms

Most ABL facilities are revolving lines of credit. As assets are converted to cash, they roll off the borrowing base, while new assets replace them.

These facilities typically carry fewer financial covenants than traditional loans, offering greater operational flexibility.

Ongoing Monitoring

Borrowers submit regular borrowing base certificates, often monthly or weekly. Lenders conduct periodic field exams to verify reporting accuracy.

While this oversight adds administrative work, many businesses find it improves internal controls and working capital management.

Asset-Based Lending vs. Traditional Bank Loans

Traditional banks focus on cash flow, profitability, and debt service capacity. Asset-based lenders focus on collateral quality and recovery value. This difference leads to several practical effects:

Approval criteria: Traditional loans require strong credit and consistent earnings. ABL can support higher leverage if asset quality is sufficient.

Speed: Traditional approvals can take months. ABL approvals are often faster because they rely on asset verification rather than projections.

Covenants: Traditional loans include detailed financial covenants. ABL facilities are typically covenant-light.

Flexibility: ABL credit expands automatically as the collateral base grows, without requiring renegotiation.

While ABL includes costs for audits and monitoring, interest rates are often competitive, particularly for borrowers who do not qualify for top-tier bank pricing.

Advantages of Asset-Based Lending

Key benefits include:

• Higher borrowing capacity for asset-heavy businesses

• Operational flexibility due to fewer covenants

• Faster access to capital once the facility is established

• Resilience during downturns, since collateral matters more than short-term earnings

• Improved financial discipline through regular reporting

Disadvantages and Considerations

ABL also has trade-offs:

• Administrative complexity from reporting and audits

• Additional costs for examinations and appraisals

• Collateral risk if assets are seized after default

• Eligibility limits, as not all assets qualify

• Structural complexity compared to simple term loans

Businesses must weigh these factors against the benefits.

Beyond Traditional Assets: Other Forms of Asset-Based Lending

Real Estate Asset-Based Loans

Some residential mortgage products qualify borrowers based on asset levels rather than income. These loans are used by self-employed individuals, retirees, and investors with substantial liquid assets and typically require larger down payments.

Bitcoin and Crypto Backed Loans

Digital assets can also serve as collateral. Bitcoin and crypto backed loans allow borrowers to access liquidity without selling their holdings. Loan-to-value ratios are around 50% depending on the specific asset used as collateral. Significant price declines can trigger margin calls requiring additional collateral or repayment. These loans follow the same core principle as traditional ABL: using valuable assets to access capital without liquidation.

How to Qualify for Asset-Based Lending

Qualification depends primarily on asset quality.

Many lenders require a minimum eligible asset base. Receivables quality, inventory marketability, equipment condition, and clear real estate title are critical. The process typically includes an initial review, field examination, term sheet, legal documentation, and setup of reporting systems. Organized records and transparency help streamline approval.

Conclusion

Asset-based lending offers an alternative to cash-flow based financing by prioritizing asset value. It can be especially effective for asset-intensive businesses facing growth, seasonality, or transitional periods.

The structure requires sufficient eligible assets to justify the complexity and cost. Businesses should evaluate whether ABL aligns with their operational capacity and financial profile. As more financing options continue to emerge, including newer asset classes, the core principle remains unchanged: well-managed assets can unlock meaningful access to capital when traditional metrics fall short.

About Arch

Arch is building a next-gen wealth management platform for individuals holding alternative assets. Our flagship product is the crypto-backed loan, which allows you to securely and affordably borrow against your crypto. We also offer access to bank-grade custody, trading and staking services.

Disclaimer: This article is for informational purposes only and does not constitute investment or tax advice. Cryptocurrency investments are volatile and risky. Always conduct your own research before making investment decisions.