Asset-based loans work by granting businesses access to working capital through a secured loan using business assets. Most lenders use the loan-to-value ratio to determine the amount of money they’re willing to approve based on the number of business assets.

In the event of a default on an asset-based loan, the lender may be able to take or sell the asset to pay off the remaining balance.

Any business with a valid form of identification and 3 months of bank statements can apply for asset-based lending. If the business has a good history of financial statements, commonly sold inventory, and reputable clients, among other things, they have a better chance of securing an asset-based loan. Manufacturers, distributors, and service companies are usually best suited as they have seasonal business needs that require immediate access to working capital and have the assets to secure a loan.

Because businesses applying for an asset-based loan are using their business assets as collateral to obtain financing, the loan is considered less risky by the lender. The lower the risk, the better the benefits offered. In most cases, asset-based loans also allow for lower rates.

Assets are business collateral that is used to secure financing whose value is equal to or similar in value to the loan amount needed. Accounts receivables, equipment, real estate property, and business bank accounts are the most common type of assets used, however, there are additional types of collateral that lenders may accept.

Requirements vary by lender. As a general rule, most lenders provide asset-based loans to businesses that are considered stable. This is shown through past business bank statements and payments on prior financing. Lenders also look for a larger amount of assets that can be used as collateral for the loan.