Running a business takes capital, and for a lot of middle-market companies, the timing of their capital needs doesn’t always line up with incoming cash. That gap can cause delays and missed opportunities, so business owners often look for other potential solutions. One of such solutions is asset-based lending.
How do asset-based loans work? When should a business consider asset-based lending? What are the pros and cons that come with this approach? First Turn Capitalis here to discuss everything you need to know.
Below, we’ll cover the following topics:
- What Is Asset-Based Lending and How Does It Work?
- When Should You Consider Asset-Based Lending?
- Types of Asset-Based Lending Structures
- How Can Your Business Benefit from Asset-Based Lending?
- Potential Drawbacks and Considerations of Asset-Based Lending
- Is Your Business a Good Candidate for Asset-Based Lending?
- Choosing the Right Asset-Based Lender
- How Asset-Based Loans Fit Into Your Business Plan
What Is Asset-Based Lending and How Does It Work?
Asset-based lending is a type of commercial financing where companies borrow money using physical assets, such as accounts receivable, inventory, equipment, or fixed assets, as collateral. Instead of depending entirely on your credit score or earnings, asset-based loans are backed by your business’s value on paper.
Suppose your company has $2,000,000 in eligible accounts receivable and inventory. An asset-based lender may offer a line of credit that advances funds based on a percentage of those assets’ value, known as advance rates. As your assets grow or shift, so does your borrowing capacity, thanks to the flexible nature of a borrowing base.
ABL loans (short for asset-based lending) usually come in two main forms: a revolving line of credit or a loan backed by longer-term fixed assets. These are monitored through regular field examinations and additional due diligence to make sure the collateral remains solid.
It’s also worth noting that asset-based financing isn’t only for struggling companies. Many well-managed businesses use ABL loans to increase liquidity, support operations, and prepare for expansion, especially when traditional bank loans don’t offer the flexibility or terms they need.
When Should You Consider Asset-Based Lending?
There’s no universal rule, but here are key moments when a business should consider asset-based lending:
- Your cash flow challenges are holding you back, even though you’re profitable on paper.
- You’re sitting on a lot of short-term assets like accounts receivable or inventory, and you want to put them to work.
- You’ve hit limits with traditional lender options, or your credit availability has tightened.
- You need additional working capital to support a growth plan, take on larger contracts, or hire new staff.
- You’re preparing for a sale, merger, or acquisition and need to clean up your balance sheet.
- Your industry has seasonal fluctuations, and your cash flow ebbs and flows.
This type of lending is especially common among companies in manufacturing, logistics, wholesale distribution, and construction sectors, where physical assets are a core part of operations.
Types of Asset-Based Lending Structures
Asset-based lending comes in a few different structures. The right setup depends on your company’s assets, financing needs, and operations.
Revolving Line of Credit
This flexible line is most often secured by accounts receivable and inventory. As you collect on invoices or replenish stock, your available capital adjusts with your borrowing base. You draw and repay as needed.
Term Loan With Fixed Repayment Schedule
This structure uses long-term fixed assets like machinery or real estate as collateral. The loan is disbursed up front, then repaid on a fixed repayment schedule.
Hybrid Facilities
Some lenders combine both approaches. For example, you might get a revolving line for working capital, plus a term loan for equipment upgrades. These hybrid structures can offer greater flexibility to address different capital needs.
Machinery Turnaround Loan
If your business is dealing with broken equipment or downtime, a machinery turnaround loancan provide fast funds for repairs or replacements. These loans are backed by the value of the equipment itself.
How Can Your Business Benefit from Asset-Based Lending?
Asset-based loans can be a powerful way to put your assets to work. One of the biggest benefits is access to working capital without selling equity. You can improve cash flow, pay suppliers faster, and make operational decisions with confidence.
Additionally, asset-based lending also gives you more flexibility than traditional bank loans. Your borrowing base adjusts as your receivables and inventory change. That means your access to capital grows along with your business.
This approach reduces your reliance on credit history. Since loans are backed by the company’s assets, lenders focus more on the value of your collateral than on past financial performance. As a result, you get faster access to cash, greater control over growth decisions, and a financing structure that fits how your business runs.
Potential Drawbacks and Considerations of Asset-Based Lending
Like any financial tool, asset-based loans come with tradeoffs. One consideration is the need for consistent reporting. You’ll work closely with a relationship manager and provide regular updates on your borrowing base, accounts receivable, and inventory.
Another consideration is that costs can be higher than with traditional loans. You may face fees for field examinations, audits, or administrative services. Interest rates may be higher as well, especially if the collateral carries risk.
If your business defaults on the loan, the lender can seize the collateral. In addition, not all assets qualify. Receivables over 90 days old, for example, may be excluded. Intellectual property and other intangible assets are typically not accepted as collateral, either.
It’s important to partner with a lender who explains everything clearly and works with you to manage these details. The right financial partner will guide you through the structure and support your financial goals.
Is Your Business a Good Candidate for Asset-Based Lending?
If your company generates steady sales but experiences uneven cash flow, asset-based lending might be advantageous. Businesses that manage large accounts receivable portfolios, keep inventory on hand, or own significant physical assets often qualify.
This structure is also well-suited for companies facing financial challenges that still have strong asset positions. If you’d rather support finance growth with debt than dilute ownership through equity, asset-based financing options provide a middle ground.
You’ll need to be more comfortable with ongoing reporting and oversight, but many companies appreciate the discipline it brings to financial operations. The best candidates are businesses looking for a financial partner rather than a mere lender.
Choosing the Right Asset-Based Lender
Working with the right partner can make or break your experience with asset-based lending. You want a lender who understands your industry, sees the bigger picture, and has experience working with middle-market clients.
Look for a team that offers customizable financing structures and is transparent during due diligence. A responsive relationship manager who’s aligned with your goals is a top priority, and it’s also worth choosing a lender who can support your company as it grows and scales.
How Asset-Based Loans Fit Into Your Business Plan
Every business needs options when it comes to financing. Asset-based loans give you a way to match funding to real-world needs.
These loans can support growth investments, like expanding production, launching new locations, or hiring new personnel. They help bridge gaps in cash flow if your receivables take weeks or months to collect. They can even support M&A plans by freeing up liquidity when it matters most. And because your borrowing capacity grows as your asset base grows, ABL can become part of a long-term financial strategy that supports flexibility and sustainable growth.
Turn Your Assets Into Working Capital With First Turn Capital
At First Turn Capital, we help businesses get the most out of their assets with flexible, straightforward asset-based loans. As a hands-on asset-based lender, we look at your company’s ability to grow—not just your credit score. We’ll walk you through the key criteria, take a close look at your receivables and inventory, and structure a loan that actually fits your business. If you qualify, we’ll work to get you higher advance rates so you have more working capital to put toward future growth.
Want to talk it through? Contact our team and let’s see how we can help!