What is Asset-based Finance (ABF)?

Asset-based finance (ABF) is a type of funding where a business uses its assets as collateral to secure financing. This form of finance can provide UK businesses with the capital they need for growth, working capital, or other operational needs, even if they lack a strong credit history. By leveraging their existing assets, companies can access funds more quickly and often on more favourable terms than traditional unsecured loans.


Key Aspects of Asset-Based Finance (ABF):

  1. Definition:
    • Asset-based finance involves securing a loan or line of credit using a company’s assets as collateral. These assets can include accounts receivable, inventory, machinery, equipment, and property.
  2. Types of Asset-Based Finance:
    • Invoice Financing: Companies sell their outstanding invoices to a financier for immediate cash. This can be structured as factoring, where the financier takes on the responsibility of collecting the receivables, or invoice discounting, where the company retains control over collections.
    • Inventory Financing: Businesses use their inventory as collateral to obtain a loan. The value of the loan is typically a percentage of the inventory’s market value.
    • Equipment Financing: Companies use their machinery or equipment to secure financing. This can be useful for businesses with valuable equipment that need to free up capital.
    • Property Financing: Real estate owned by the business is used as collateral for a loan, often yielding higher loan amounts due to the typically high value of property.
  3. How It Works:
    • Asset Valuation: The lender assesses the value of the assets being offered as collateral. This often involves an independent appraisal or valuation.
    • Advance Rate: The lender determines an advance rate, which is the percentage of the asset’s value that can be borrowed. For example, an advance rate of 80% on £100,000 of receivables would allow the business to borrow £80,000.
    • Loan Structure: The loan amount, interest rate, and repayment terms are agreed upon based on the value and type of assets used as collateral.
    • Monitoring: Lenders typically monitor the value of the collateral over time, requiring regular updates on the status of the assets.
  4. Benefits:
    • Improved Cash Flow: Provides immediate access to funds, helping businesses manage cash flow and cover operational expenses.
    • Flexibility: Financing amounts can grow with the business’s assets, offering a scalable solution that adjusts to the company’s needs.
    • Accessibility: Easier to obtain than traditional loans, especially for businesses with strong assets but less established credit histories.
    • Lower Cost: Often has lower interest rates compared to unsecured loans due to the reduced risk for the lender.
  5. Disadvantages:
    • Risk of Asset Loss: If the business fails to meet repayment terms, the lender can seize and sell the collateral assets.
    • Cost: There may be additional costs for appraisals, legal fees, and ongoing monitoring of the assets.
    • Complexity: Managing and maintaining the collateral can require additional administrative effort.
  6. Suitability:
    • Growing Businesses: Companies experiencing growth that need additional working capital to support expansion.
    • Seasonal Businesses: Firms with seasonal cash flow fluctuations, such as retailers, can use ABF to manage off-peak periods.
    • Asset-Rich Companies: Businesses with substantial physical or receivable assets that can be leveraged for financing.

Example of Asset-Based Finance:

A UK-based manufacturing company needs £500,000 to purchase raw materials for a large order. They have the following assets:

  • Accounts Receivable: £300,000
  • Inventory: £400,000
  • Machinery: £500,000

The lender evaluates these assets and determines the following advance rates:

  • Accounts Receivable: 80%
  • Inventory: 50%
  • Machinery: 60%


  • Accounts Receivable: £300,000 × 80% = £240,000
  • Inventory: £400,000 × 50% = £200,000
  • Machinery: £500,000 × 60% = £300,000

Total potential loan amount = £240,000 (receivables) + £200,000 (inventory) + £300,000 (machinery) = £740,000

The company can borrow up to £740,000 based on the value of its assets, providing ample funds for its operational needs.



Asset-based finance (ABF) offers UK businesses a flexible and accessible way to leverage their assets for funding. By using assets such as receivables, inventory, machinery, and property as collateral, companies can improve cash flow, support growth, and manage working capital more effectively. Understanding the benefits, risks, and suitability of ABF helps businesses make informed decisions about their financing options and optimize their financial strategy.