Asset Based Lending

Asset based lending is an asset-based lending facility secured on a debenture with fixed and floating charges across the ledger, stock, plant, machinery and property. Asset-based lending is a borrowing-base discipline: the facility size moves with the collateral, month by month.

Structurally, the facility is secured on a debenture with fixed and floating charges across the ledger, stock, plant, machinery and property, written over committed facilities of two to three years, reviewed against a borrowing base, with up to 90% against the ledger, 50% to 60% against stock, and lower percentages against plant and property. Lenders assess the exit before the entry: the facility revolves against the borrowing base and is refinanced or repaid at review or on a corporate event. That ordering explains why two applicants with identical income can receive materially different terms — the credit question is whether the repayment route survives a slower market, not whether the borrower looks creditworthy today.

Activity in this segment comes from independent factoring and discounting houses, selective and single-invoice platforms, specialist funders for construction and recruitment ledgers and bank-owned invoice finance providers. Each prices the same invoice finance case against its own funding cost and risk appetite, which is why the same asset based lending case can attract offers several percentage points apart. The Financial Conduct Authority supervision shapes conduct standards and, where the borrowing is regulated, the advice and disclosure obligations that sit around the transaction.

Eligibility for asset based lending is assessed on the asset first and the applicant second. Lenders test a borrowing base recalculated regularly, with covenant headroom tested against the combined collateral pool, then satisfy themselves that the facility revolves against the borrowing base and is refinanced or repaid at review or on a corporate event remains achievable under stressed assumptions. Trading history, sector, and the quality of the security all move the answer, and a marginal case is far more often declined on evidence gaps than on the underlying numbers.

A complete submission normally contains independent valuations of stock, plant and property, audited accounts and detailed management information, a pre-lend audit of systems, ledger and stock records and a full borrowing base analysis across every asset class. Where any of these are missing, underwriters price the uncertainty rather than ignore it, so incomplete packs tend to return higher rates or lower advances rather than an outright refusal. Preparing the pack before approaching lenders is the single most effective way to protect the terms available.

Where the pack is thinner, underwriters ask for independent valuations of stock, plant and property and audited accounts and detailed management information before they will commit, because those items evidence the part of the case the security cannot. Asset-based lending is a borrowing-base discipline: the facility size moves with the collateral, month by month. The trade-off is cost: flexibility on criteria is almost always paid for in margin, fees, or a lower advance against value.

Consider a borrower using asset based lending where a turnaround is supported where cash-flow lending is unavailable. The starting point is the security: an independent valuation establishes what the asset supports, and up to 90% against the ledger, 50% to 60% against stock, and lower percentages against plant and property sets the realistic ceiling on the facility. The gap between the ceiling and the funds required is the equity or additional security the borrower must contribute.

The facility is then sized against a borrowing base recalculated regularly, with covenant headroom tested against the combined collateral pool, and the term is set by the repayment route rather than by preference — the facility revolves against the borrowing base and is refinanced or repaid at review or on a corporate event. Costs are modelled across the full term, including arrangement and exit fees, so the comparison against alternatives is made on total cost rather than on headline rate.

Two details decide whether that structure holds. The first is documentary: audited accounts and detailed management information, a pre-lend audit of systems, ledger and stock records and a full borrowing base analysis across every asset class must support the figures rather than follow them. The second is timing — facilities are commonly live within one to three weeks, with selective single-invoice funding available considerably faster. — because every week the facility runs beyond plan is charged at the facility rate rather than at the rate the borrower budgeted.

This example is illustrative. It is not a quotation, a recommendation, or evidence of available terms; actual pricing depends on valuation, credit assessment, and the lender's appetite on the day. Its purpose is to show the order in which decisions are made, because borrowers who understand that sequence present far stronger applications.

Pricing is built rather than quoted. The headline rate reflects a margin over base rate on the drawn balance, plus a non-utilisation fee and a monitoring or audit charge, and the effective cost only becomes visible once arrangement fees, valuation and legal costs, and any exit or early-repayment charge are added to the same calculation. Comparing two offers on rate alone routinely selects the more expensive facility.

Three variables move the price materially: where the request sits against up to 90% against the ledger, 50% to 60% against stock, and lower percentages against plant and property, how a borrowing base recalculated regularly, with covenant headroom tested against the combined collateral pool is evidenced, and the time the lender is exposed before the facility revolves against the borrowing base and is refinanced or repaid at review or on a corporate event. Reducing the advance is usually the most efficient lever, because it lowers loss-given-default for the lender and therefore the margin charged. Figures discussed at enquiry stage are indicative and subject to valuation and full underwriting.

Borrowers should also price the cost of delay. Facilities are commonly live within one to three weeks, with selective single-invoice funding available considerably faster. Asset-based lending is a borrowing-base discipline: the facility size moves with the collateral, month by month. Where a transaction has a fixed deadline, a slightly higher margin from a lender that can meet the date is frequently cheaper than a lower margin that misses it and forfeits a deposit or a negotiated purchase price.

An application moves through four stages: an initial assessment of security and requirement, a terms sheet or decision in principle, valuation and legal due diligence, then formal offer and drawdown. Facilities are commonly live within one to three weeks, with selective single-invoice funding available considerably faster. The valuation and legal stage accounts for most of the elapsed time and is where avoidable delays occur.

Preparation shortens the timetable more than lender selection does. Having independent valuations of stock, plant and property, audited accounts and detailed management information and a pre-lend audit of systems, ledger and stock records ready at enquiry allows a lender to issue terms on evidence rather than assumption, and reduces the number of conditions attached to the offer. Instructing solicitors experienced in invoice finance at the same time prevents the legal work starting from a standing position after the offer arrives.

Conditions precedent are normal and usually procedural: confirmation of insurance, satisfactory searches over a debenture with fixed and floating charges across the ledger, stock, plant, machinery and property, and evidence of the deposit or contribution. Treating them as a checklist to clear in parallel, rather than in sequence, is the practical difference between a transaction that completes on time and one that requires an extension.

The principal risks in asset based lending are advance rates being reduced at review if collateral quality slips, covenants triggering on the borrowing base rather than on profitability, the whole business being encumbered under a single debenture and regular audits and reporting imposing a real administrative burden. Asset-based lending is a borrowing-base discipline: the facility size moves with the collateral, month by month. All of them are manageable when they are priced at the outset rather than discovered mid-transaction.

The most common failure mode is an exit that slips. The facility revolves against the borrowing base and is refinanced or repaid at review or on a corporate event If that route depends on a sale or a refinance, a slower market extends the term, and extension terms are rarely as favourable as the original facility. Building contingency into the timetable is materially cheaper than negotiating it under pressure.

Independent valuation advice, early legal instruction, and a written repayment plan reviewed against a downside case address most of the exposure. Where borrowing is regulated, The Financial Conduct Authority conduct rules require suitability to be assessed and disclosed; where it is not, that discipline remains good practice rather than an obligation.

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