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What is Asset-Based Finance?

Last editedMar 20222 min read

2022 is likely to be a challenging year for many SMEs. With inflation rising to around 6% by spring, the cost of doing business is likely to put a squeeze on virtually everyone’s profit margins. Everything from the cost of raw materials to business energy prices is set to rise. And since the cost of living is getting higher for consumers, this may impact business revenues.

As such, it behoves business owners to know their options when it comes to raising operational capital. You never know when you may need an injection of ready capital to ease cash flow, or take advantage of a capital investment that will make your business more profitable in the long term.

Asset-based finance can be a fast and flexible way to raise working capital. But as with any form of credit, it’s important to understand the benefits and caveats to decide whether it’s the right option for your business.

Let’s take a closer look.

Asset-based finance explained

As the name suggests, asset-based finance enables businesses to leverage physical and intangible assets as leverage against borrowing.

These assets act as security against the facility, and you are at risk of losing them if you are unable to keep up with your repayments. You can use all sorts of assets to secure this finance including:

  • Plant and machinery

  • Property

  • Stock / inventory

  • Intellectual property

  • Debtors

As well as high street banks, there are a number of specialist business lenders that offer asset-based lending for SMEs.

Advantages of asset-based finance

SMEs may, understandably, be apprehensive about securing their assets against a facility. However, there are a number of advantages to asset-based finance when compared to unsecured business loans:

  • Asset-based lending represents less of a risk for lenders, so interest rates are advantageous when compared to unsecured facilities

  • Businesses can raise large sums with asset-based lending with facilities in excess of £1 million. These by far eclipse the sums that can be raised through unsecured borrowing

  • It can provide fast access to liquidity. As long as you meet the eligibility criteria, you could receive funds within four weeks

  • Terms of borrowing are fixed, allowing for easy budgeting and cash flow forecasting

  • It’s also highly flexible, with very few restrictions on how you can spend the money, enabling you to distribute working capital to wherever it's needed most

Asset-based finance eligibility criteria

In order to apply for asset-based finance, you will need to demonstrate an established trading history to lenders, as well as proof of the assets you intend to leverage. If you are securing your facility against stock or inventory, you will need to provide proof that this inventory is commonly sold and that you will be able to keep up with repayments.

The more assets you have, the more you will be likely to borrow. Lenders will make their decision based on:

  • The type and value of the assets held

  • Your trading history

  • Your financial performance in previous years

Things to consider when applying for asset-based finance

Like any form of credit, asset-based finance will have a lasting impact on your operation’s finances. As such, you will need to carefully consider the following when you apply:

  • What is the interest rate on the facility?

  • How long will the loan impact your cash flow?

  • What is the advance rate against your assets?

  • Will your lender impose charges if you want to repay the facility early?

  • What will be the overall cost of borrowing?

We can help

If you’re interested in finding out more about asset-based finance and generating working capital for your business, get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.

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