Glossary

Asset Based Lending

Asset Based Lending

As one of the UK’s leading commercial finance providers, we aim to help your business achieve its goals by providing you with the funding required to reach your growth potential. There are a number of ways to secure that funding, but arguably none more popular nor versatile than asset based lending.

An asset based loan enables your business to access the cash amount it needs based on the assets sat on your balance sheet right now. Using an in-depth and consultative approach, we’ll use those assets firstly as a base to calculate a suitable loan amount for you, and secondly as security against the funding we provide.

It’s a great way to free up money otherwise tied up within your business and offers flexible, fast, and stable financing towards your strategic goals – hence why it’s the lending method of choice for the majority of UK borrowers.

Of course, before heading into any loan process, it’s essential to understand exactly how it works. Asset based lending for small businesses is a tried and tested formula, but is it right for you? Read on the find out everything you need to know about the asset based lending process.

What is asset based lending?

Asset based lending, also referred to as commercial finance, is a type of loan available to businesses that involves offering a business's assets as security to the lender. In other words, it allows companies to borrow based on the liquidation value of their assets. There are numerous ways to provide security from assets but, generally speaking, assets that are deemed appropriate are a business’s accounts receivable (invoices), inventory, or equipment and machinery.

Asset based lending is a fantastic financial solution available to businesses, as the loan is given on the premise that the value of the assets is pledged as collateral. The type of assets pledged by the borrower will determine the terms and conditions set by the lender. 

What sort of assets can be used as collateral in an asset based lending process?

There are four main physical asset areas that are typically used as collateral:

  • Accounts receivable/debtor invoices
  • Plant and machinery
  • Stock (inventory)
  • Property

How does asset based lending work?

In a typical asset based lending process, the first step is to assess the asset based lending borrowing base of the applicant. The borrowing base is defined by the total value of the borrower’s assets to be designated as collateral, i.e., the invoices, equipment, stock, or property you’re willing to submit as security against the loan.

Depending on your business’ credit rating, your asset based lending borrowing base could be anywhere from 75%-90% of the face value of your collateral assets with a higher credit score, or 50%-75% based on a weaker credit rating.

Asset based lending services come with a significant amount of due diligence. Before you are accepted for a loan the lender will need to understand your legal, accounting and tax framework, and analyse and appraise your financial statements and assets. The underwriting process behind this will determine your chances of approval and the asset based lending interest rates charged on the loan.

How does the asset based lending process work with Nucleus?

Our approach to the asset based lending market is immersive and tailored to your business. We don’t have any pre-determined criteria for our applicants. Instead, we’ll look to identify your borrowing needs and asset profile and calculate a loan amount that makes sense for your circumstances.

We establish our asset based lending terms based on the makeup of your funding. This is done following a five-step process that includes face-to-face consultation, onsite assessments, and careful structuring of terms, along with a subsequent offer on a loan amount that can range from £100,000 to £50 million.

We also tailor our settlement terms to suit you, allowing for a repayment period that extends as far as seven years. Pending the completion of your application, you can access your funding within a day of approval.

Our process is designed to be as simple, efficient, fast, and manageable as possible. From your first consultation through to the very last day of your loan agreement. you’ll benefit from our vast experience and expertise in commercial finance.

Our focus is on creating long-term relationships with our clients, and we believe in the stability and growth potential that our asset based lending finance can provide. Request a call back to find out more about how we can help.

What can asset based lending funds be used for?

Asset based lending finance is exceptionally versatile and can work for any business with owned assets. As such, the nature of how it can be used is also highly varied, but there are a number of significant growth and enhancement areas that new, asset based funding can be designated to:

  • Acquisitions
  • Succession planning
  • Growth
  • Boosting cash flow
  • Turnaround strategy funding

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    What are the benefits of asset-based lending?

    There are a number of reasons why asset-based lending in the UK has become the primary choice for a huge spectrum of borrowing businesses:

    • Utilisation of assets: Asset based lending allows you to maximise the financial potential locked within your business. Invoice finance and asset based lending, for example, allows businesses to fill the void of unpaid receivables owed to them with immediate funding and a significant boost to their cash flow.
    • Flexibility: Asset based lending finance comes with few to no restrictions on how your business can use its new funding, opening up a number of potential growth avenues. Also, while the assets you’ve offered up as collateral cannot be used to secure any other finance, you are welcome to seek other funding alongside your asset based loan.
    • Stability and control: Because we tailor repayment terms to suit you, you can establish a clear and manageable repayment plan that keeps your financial situation stable. Likewise, when you borrow via asset based lending, you can still retain control of your equity in the business.
    • Fast: Once the relevant due diligence and your application is completed, you can gain access to your agreed funding within a day of approval. Overall, the asset based lending process can take as little as four weeks from the beginning of your application to completion.

    What are the risks of asset based lending?

    Of course, no loan comes without its risks, and asset based lending, by virtue of the requirements behind it, isn’t for every business. The risk points you need to consider are:

    • Your credit report: Any eligibility check and subsequent credit checks and due diligence carry with them a hard credit check that will show on your credit report and could affect your credit rating negatively. Thus, any application should not be carried out without proper preparations.
    • Additional charges: Your asset based lending rates will be predefined at the beginning of the agreement, but it’s worth noting that if you default on payments or try to pay off your loan early, you could be faced with additional charges. Similarly, late payments can affect your credit report.
    • Asset risk: Failure to make repayments could mean your assets you’ve placed as security are seized and sold off.

    Commercial asset based lending against other lending alternatives

    The asset based lending industry is going from strength to strength based on its versatility and accessibility, but it’s not the only funding format available by any means. Once you’ve looked at the pros and cons of an asset based lending process, you may wish to consider other lending sources. Here’s a quick comparison of the main alternatives.

    Asset based lending vs traditional lending

    Otherwise known as cash flow finance, traditional, cash flow-based lending is typically unsecured funding evaluated on the credibility of your accounts and future projected cash flow. It’s often a much more rigid approach than asset based lending that requires several eligibility requirements but is widely used to address a number of everyday business challenges including unexpected bills, new staff or premises funding, and immediate growth plans.

    Our cash flow financing services look to combine the expertise and credit facilities of a traditional bank while incorporating the flexibility, speed, and transparency of alternative lending. Financing limits on cash flow lending are significantly reduced against those of asset based lending, with a range of £25,000-£250,000 available through our services.

    The absence of collateral required in cash flow lending makes it an ideal solution for well-established businesses looking to address short-term financial challenges without placing any assets at risk.

    Asset based lending vs factoring

    If you are looking to find stability within your accounts receivable, factoring is a cash advance solution that can address the issue of unpaid invoices. Factoring is not a loan, but rather a cash advance that involves selling your unpaid invoices to a third party, who will then look to collect those invoices and usually a 1-3% portion of said invoices in the process.

    There are two types of factoring. Recourse factoring holds you accountable in the instance of non-repayment by a client. Non-recourse factoring doesn’t hold you responsible for client repayments.

    Factoring is useful for debt-free stabilisation of up and down cash flow and businesses with slow-paying clients. However, it does not typically offer the financial expansion possibilities of asset based lending, nor the possibility to borrow based on assets outside of accounts receivable.

    For businesses that take card payments, our business cash advance services are another method of creating stability in your cash flow.

    Discover the power of asset based alternative lending with Nucleus

    Combing the expertise and credit facilities of traditional banking with the speed, efficiency, and transparency of alternative lending, we’re here to help your business achieve the next stage of its growth. Our asset based lending consultants can help you understand the financial potential hidden within your key assets and how you can use it to reach your strategic goals and beyond.

    Contact us today to find out more about asset based lending and how Nucleus commercial finance could provide the right funding solution for you.


    BY Jessica Lambert

    5 August, 2022

    4MIN

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