Asset-based lending

Definition

Asset-based lending is a type of financing where businesses secure loans using assets like inventory, accounts receivable, or equipment as collateral.

What is asset-based lending?

Asset-based lending (ABL) refers to a financing method where a business borrows money by leveraging its assets as collateral. These assets can include accounts receivable, inventory, equipment, or other tangible items with measurable value. Unlike unsecured loans that rely on credit history or cash flow alone, ABL is secured by the value of the assets pledged.

Lenders evaluate the quality and liquidity of the assets rather than focusing solely on the borrower’s credit score. If the borrower defaults, the lender can recover losses by seizing the assets. Because of this, asset-based loans are often more accessible to businesses with solid balance sheets but limited cash flow or lower credit ratings.

This type of lending can be structured as a one-time loan or a revolving line of credit, depending on the borrower’s needs. It’s especially useful for businesses experiencing rapid growth, seasonal fluctuations, or temporary cash flow gaps.

How it works in eCommerce

In the eCommerce world, asset-based lending can be a strategic funding solution for sellers who have valuable but illiquid assets. For example, inventory stored in warehouses or outstanding invoices from wholesale clients can be used as collateral to access working capital.

This type of financing is particularly useful for inventory-heavy businesses or sellers preparing for seasonal surges. Instead of waiting for revenue from future sales, sellers can tap into the value of existing assets to reinvest in stock, marketing, or expansion efforts.

For eCommerce businesses dealing with delayed payouts from platforms or longer supplier lead times, asset-based lending offers a way to maintain operational momentum. It enables sellers to bridge financial gaps without giving up equity or relying solely on sales-based funding.

Benefits

1. Access to capital for asset-rich businesses: Sellers with valuable inventory or strong receivables can unlock funding even with limited cash flow or lower credit scores.
2. Flexible financing structure: Can be structured as revolving credit or term loans, offering more control over how funds are used.
3. Supports growth and stability: Helps maintain operations during slow sales periods or while scaling.
4. Lower risk to lenders: Since the loan is backed by collateral, lenders are more likely to approve funding at competitive rates.
5. Preserves equity: Businesses can raise funds without giving up ownership, unlike equity financing.

Challenges

1. Collateral requirements: Businesses must have valuable, verifiable assets to qualify.
2. Risk of asset seizure: Defaulting on the loan can result in losing critical business assets.
3. Regular monitoring: Lenders often require frequent reporting and audits of the pledged assets.
4. Lower loan-to-value ratios: Lenders may offer only a percentage of the asset’s total value, limiting how much capital can be accessed.
5. Complex setup: The due diligence process can be time-consuming and may require legal or accounting support.

Might also interest you:

• How to balance supply and demand for perfect inventory management
• The complete guide to revenue based financing
• 7 reasons successful eCommerce sellers opt for funding to fuel growth instead of relying on profits

Examples and use cases

1. Funding holiday inventory: An online toy store uses its unsold Q3 inventory as collateral to secure a short-term loan for holiday stock. The funding helps the business prepare early for the season without waiting for previous products to sell through.
2. Using unpaid invoices: A B2B seller on Shopify uses accounts receivable from wholesale clients to access capital. The business uses the funds to fulfill a large incoming order and scale operations.
3. Expanding operations: A mid-sized electronics seller with steady inventory turnover uses its warehouse stock to secure an asset-based line of credit. The flexible structure allows them to restock faster and expand into a new product category.
4. Bridging cash flow gaps: A fashion brand with most capital tied up in unsold apparel uses ABL to bridge a gap caused by platform payout delays, helping them continue marketing and fulfill orders during a peak sales period.