If you’re looking to borrow a larger sum of money for your business, or reduce potential interest rates on what you borrow, one of the most common routes is to offer some form of asset as security. Asset-backed lending (ABL) is a type of loan where a business uses its assets as collateral to obtain capital, reducing risk for the lender and opening up opportunities for the borrower.
Common assets that can be leveraged include accounts receivable (money owed to your business), inventory, equipment, and property. For businesses with valuable assets but inconsistent cash flow or lower credit scores, asset-backed lending offers an effective way to unlock liquidity and access funds for working capital, expansion, or new investments. However, it also opens up the possibility of those assets being seized by the lender if you can’t meet the repayments.
What is asset-backed lending?
Asset-backed lending is a kind of secured business loan, where you offer some type of material guarantee to a lender in exchange for access to finance. This is in contrast to an unsecured business loan, where there is no collateral involved.
The advantage of asset-backed lending is the ability to unlock working capital based on your existing assets, turning them into liquidity to manage day-to-day operations or invest in growth opportunities.
- Asset-backed lending focuses more on the value of the borrower’s assets than their credit history or cash flow.
- Lenders assess the asset's value to determine the loan amount, often using a loan-to-value (LTV) ratio. The higher the asset's liquidity and resale value, the more favourable the LTV ratio, which can range from 50% to 80%.
This can help you access larger sums at lower rates, but it also puts your assets at risk.
What assets can be used for asset-backed lending?
Different types of assets can be pledged to secure an asset-backed loan, and the suitability of each depends on its liquidity, value, and risk level. The most common assets used include:
- Accounts receivable: These represent money owed to your business by customers. Lenders value accounts receivable highly because they are considered a near-term cash inflow. You can borrow up to 80% of the value of your receivables.
- Inventory: Stock or goods ready for sale can be used as collateral, especially for retail or manufacturing businesses. Typically, lenders may offer 40-60% of the value of inventory.
- Machinery and equipment: Large, expensive equipment such as manufacturing machines, medical devices, or vehicles can serve as collateral. Depending on the depreciation (loss in value over time) of these assets, you can borrow up to 60% of their value.
- Real estate: Property, including land and buildings, is one of the most valuable forms of collateral due to its stability and long-term value. Loans backed by real estate can offer up to 70-80% of the property’s value.
- Intellectual property: Patents, trademarks, or copyrights can also be used as collateral. While this is less common, businesses with significant intellectual property value can use it to secure funding.
How does asset-backed finance loan-to-value (LTV) work?
The Loan-to-Value (LTV) ratio is a key consideration in asset-backed lending, as it determines how much of the asset’s value can be borrowed. Lenders typically offer varying LTVs depending on the asset's type, liquidity, and risk.
For example, a business with £1,000,000 in commercial property may secure a loan of £700,000 to £800,000, whereas equipment valued at £500,000 may only result in a £325,000 loan.
Higher LTV ratios generally indicate a lower risk for the lender, as they can recoup a larger portion of the loan by liquidating the asset in case of default.
Comparing asset-backed lending vs. unsecured loans
While asset-backed lending is ideal for businesses with well, assets, unsecured business loans offer a more flexible option for companies that may not have valuable collateral or don’t want to risk losing their assets.
1. Collateral Requirements
- Asset-backed lending: Requires physical or financial assets to secure the loan. If the borrower defaults, the lender can seize these assets.
- Unsecured loans: No collateral is needed. These loans are typically based on the borrower’s creditworthiness and business performance, with no risk to assets.
2. Interest Rates
- Asset-backed lending: Interest rates are generally lower because the loan is secured by material objects that a lender can recoup if needed.
- Unsecured loans: Interest rates are higher, reflecting the increased risk to the lender. However, they often come with quicker approvals and fewer requirements.
3. Loan Amounts
- Asset-backed lending: Businesses can access larger loan amounts by leveraging high-value assets like real estate or large equipment.
- Unsecured loans: While loan amounts are typically smaller and based on the business’s financial health and credit history rather than collateral, some unsecured lenders such as iwoca can offer up to £1,000,000 without assets as security.
4. Risk
- Asset-backed lending: There’s always the risk of losing assets if the business defaults on payments.
- Unsecured loans: No risk of asset loss, making them a safer option for businesses without substantial collateral or those looking to avoid pledging assets.
What are asset-backed loans used for?
Asset-backed loans are widely used for a variety of business purposes, including:
- Working Capital: These loans can help businesses maintain liquidity by turning assets like accounts receivable into cash to cover operational expenses.
- Inventory Purchases: Retailers and manufacturers can use asset-backed finance to buy new stock, especially during peak seasons.
- Equipment Financing: Companies can secure loans to purchase or upgrade machinery and equipment, using these assets as collateral.
- Business Expansion: Asset-backed loans provide the capital required for expanding a business, whether by opening a new location, investing in new technology, or entering new markets.
- Debt Refinancing: Businesses with multiple existing debts may consolidate them using an asset-backed loan, which often offers better terms or lower interest rates.
Alternatives to asset-backed finance
For businesses that either don’t have available assets or prefer not to risk them, several alternatives to asset-backed lending are available:
- Unsecured business loans: As mentioned earlier, unsecured loans provide fast access to capital without needing collateral. This makes them ideal for businesses that rely on cash flow rather than physical assets.
- Invoice financing: For businesses with strong accounts receivable, invoice financing allows them to access cash tied up in unpaid invoices. Lenders advance a percentage of the invoice value, which can be used as immediate working capital.
- Merchant cash advances: Merchant cash advances provide businesses with a lump sum in exchange for a portion of future sales, offering quick access to cash without collateral.
- Business lines of credit: Business lines of credit option allows businesses to borrow up to a pre-approved limit, only paying interest on the amount drawn. It’s a flexible solution for businesses with variable capital needs.
Why fund your business with an iwoca Flexi-Loan
If your business is in need of funding, but you have, or want to risk suitable assets, then you can still apply for financing with an iwoca unsecured Flexi-Loan. .
- No collateral needed: iwoca’s loans are unsecured, meaning you don’t have to put up valuable assets to obtain funding.
- Fast access to funds: With iwoca, businesses can secure funds within 60 hours, making it ideal for when you need financing fast.
- Flexible repayments: We offer repayment terms that adapt to your business’s cash flow, with no penalties for early repayment.
- Transparent fees: You’ll always know exactly how much your loan will cost from the outset, with no surprises.
Borrow £1,000-£1,000,000 over up to 60 months – join the 90,000+ businesses that use iwoca finance to grow and invest in their future. Try our small business loans calculator to see how much you could borrow.
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