What is Asset Based Lending (ABL)?

Asset-Based Lending (ABL) is a form of financing where a company uses its assets as collateral to secure a loan. This type of lending is particularly useful for UK businesses that need to improve cash flow, fund growth, or manage working capital. Understanding how ABL works and its benefits can help businesses make informed decisions about their financing options.


Key Aspects of Asset-Based Lending (ABL):

  1. Definition:
    • Asset-Based Lending is a type of loan where the amount borrowed is secured by the company’s assets. These assets can include accounts receivable, inventory, machinery, equipment, and real estate.
  2. How It Works:
    • Collateral Evaluation: The lender assesses the value of the company’s assets to determine the loan amount. This involves evaluating the liquidity and marketability of the assets.
    • Advance Rate: The lender offers a loan based on a percentage of the asset’s value, known as the advance rate. For example, if the advance rate for accounts receivable is 80%, and the company has £100,000 in receivables, it can borrow up to £80,000.
    • Ongoing Monitoring: The lender regularly monitors the value of the collateral. The business may need to provide updated financial statements and reports to ensure the loan remains adequately secured.
  3. Types of Assets Used as Collateral:
    • Accounts Receivable: Outstanding invoices owed by customers.
    • Inventory: Raw materials, work-in-progress, and finished goods.
    • Machinery and Equipment: Operational equipment and machinery used in production.
    • Real Estate: Commercial property owned by the business.
  4. Benefits:
    • Improved Cash Flow: Provides immediate access to cash, helping businesses manage day-to-day expenses and invest in growth opportunities.
    • Flexible Financing: The loan amount can grow with the business’s assets, offering a scalable financing solution.
    • No Need for Strong Credit History: ABL focuses on the value of the assets rather than the credit history of the business, making it accessible for businesses with limited credit history.
    • Retain Ownership: Unlike equity financing, ABL allows businesses to retain full ownership and control.
  5. Disadvantages:
    • Cost: ABL can be more expensive than traditional loans due to higher interest rates and fees.
    • Asset Seizure Risk: If the business defaults on the loan, the lender can seize and sell the collateral assets.
    • Ongoing Compliance: Requires regular reporting and compliance with covenants set by the lender, which can be administratively burdensome.
  6. Typical Users of ABL:
    • Growing Businesses: Companies experiencing rapid growth that need additional working capital.
    • Seasonal Businesses: Businesses with seasonal fluctuations in cash flow, such as retailers or agricultural companies.
    • Turnaround Situations: Companies undergoing restructuring or turnaround that need liquidity to stabilize operations.

Example of Asset-Based Lending:

A UK-based manufacturing company needs £500,000 to expand its production line. The company has 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 expansion plans.



Asset-Based Lending (ABL) is a valuable financing option for UK businesses seeking to leverage their assets to secure funding. By understanding how ABL works, its benefits, and potential drawbacks, businesses can make informed decisions to improve cash flow, support growth, and manage working capital. Proper management and regular monitoring of assets are essential to maintaining a healthy relationship with lenders and ensuring continued access to this flexible financing solution.