An asset based loan is a revolving line of credit sized by the value of your receivables, inventory and sometimes equipment, rather than by your earnings alone. It suits businesses with substantial working assets whose profits are uneven, growing fast or recovering, and it usually offers more borrowing room than a cash flow based bank line.
How asset based lending works
The lender sets a borrowing base: the total you can draw at any time, recalculated as your assets change. Each asset class gets an advance rate, which is the percentage of its value the lender will lend against.
| Collateral | Typical advance rate | How it is valued |
|---|---|---|
| Eligible receivables | 75 to 90 percent | Face value of current invoices to creditworthy customers |
| Finished goods inventory | 50 to 65 percent of cost, or up to 85 percent of liquidation value | Net orderly liquidation value from an appraisal |
| Raw materials | Lower than finished goods, sometimes excluded | Depends on how easily the materials resell |
| Machinery and equipment | 70 to 85 percent of liquidation value | Appraisal, often as a term loan beside the revolver |
| Commercial real estate | 50 to 75 percent of appraised value | Appraisal, as a term loan component |
You send the lender a borrowing base certificate weekly or monthly, showing current receivables and inventory. The lender applies the advance rates, subtracts ineligible items, and tells you how much you can draw. Customer payments flow into an account the lender controls and pay down the line each day, and you redraw as you need cash.
Asset based facilities range from a few million dollars at specialist lenders to hundreds of millions at large banks. Smaller businesses whose main asset is receivables often start with invoice factoring, which works on a similar logic invoice by invoice, and move to asset based lending as they grow.
Who offers asset based loans
Bank asset based lending groups. Large and regional banks run dedicated asset based units. They offer the lowest cost and largest facilities, and they want businesses with reliable reporting, usually reviewed or audited financial statements, and enough size to justify field exams.
Independent asset based lenders. Non bank asset based lenders take on situations banks avoid: losses, rapid growth, turnarounds, high leverage, or concentrated customers. They cost more and charge more fees, but they lend on assets when the earnings story is weak.
Factors with asset based programs. Many factors also offer receivables and inventory lines for clients who have outgrown invoice by invoice factoring.
Equipment lenders. Equipment lessors and equipment finance companies lend against machinery separately, which can sit beside a receivables and inventory line from another lender.
In Canada, the major banks, several foreign bank branches and a group of independent lenders provide asset based facilities, with the strongest activity in manufacturing and distribution centres in Ontario, Quebec and Alberta. In the US, activity is national, with large concentrations of lenders around major commercial centres.
What lenders check
Receivables quality. Lenders exclude invoices over 90 days from invoice date (or 60 days past due), receivables from affiliates, foreign customers without credit insurance, contra accounts where you also owe the customer, and the full balance of any customer with too much past due. They cap concentration in a single customer. The result is your eligible receivables, which can be well below your total.
Inventory quality. Finished goods that sell quickly are the most valuable. Work in progress is usually excluded. Slow moving, obsolete, consigned or custom inventory gets lower value or none. The lender's appraiser estimates what the inventory would bring in an orderly sale.
Reporting and systems. Lenders need accurate, timely aging reports and perpetual inventory records. Weak systems are a common reason a deal fails. Lenders also test your reporting through field exams, where an examiner visits, reconciles your books to your borrowing base and samples invoices.
Cash flow and covenants. Asset based lenders rely on collateral, but they still want to see a path to profitability. Many facilities carry a fixed charge coverage covenant that applies only when your available borrowing falls below a set level. This is called a springing covenant, and it gives you more room than a traditional bank line.
Liens and priority. The lender takes a first priority security interest over the collateral, registered through UCC filings in the US or PPSA registrations in Canada. Existing lenders must be paid out or agree to an intercreditor arrangement. Priority claims such as unpaid payroll source deductions, sales tax, wages and certain supplier rights reduce what the lender will advance, and Canadian lenders reserve for these explicitly.
Costs and terms in general
Pricing is usually a floating rate over a benchmark for the revolver, with a spread that reflects the lender type and your risk profile. Bank asset based groups price closest to conventional bank lines. Independent lenders price higher. Beyond interest, expect:
- An unused line fee on the undrawn portion
- Field exam and appraisal fees, charged at the start and periodically after
- Collateral monitoring fees at some lenders
- Legal fees for documentation
- Early termination fees during the first one to three years at many independent lenders
Facilities usually run for three to five years and renew.
Process and timing
Expect four to eight weeks from first conversation to funding.
- Initial review. You share financial statements, receivables and payables agings, an inventory listing, a customer list and a forecast. The lender issues an indicative term sheet.
- Due diligence. A field exam, an inventory appraisal and, if relevant, an equipment or real estate appraisal. This stage takes the longest.
- Approval and documentation. Credit approval, loan agreement, security documents and the cash management setup.
- Funding. The lender pays out existing lenders and funds the first draw against your borrowing base.
Prepare your reporting before you apply. Clean agings, reconciled inventory and a clear explanation of any losses shorten diligence and improve your terms.
Which lenders to approach
If you have revenue above roughly $10 million, steady reporting and positive or recovering earnings, start with bank asset based groups. If you are growing fast, carrying losses, refinancing a bank that wants to exit, or concentrated in a few customers, approach independent asset based lenders. If receivables are your only substantial asset and you are still small, compare a factoring arrangement with a line of credit. If machinery is a large part of your balance sheet, add an equipment financing lender for a separate term piece.
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