Some business borrowing is assessed on the company's trading performance and some on what it owns. The second approach follows a different logic and produces very different terms.
The asset is the primary repayment source
Conventional lending looks first at whether the business will generate enough cash to service the debt, with security as a secondary protection if that fails.
Asset-based lending reverses the emphasis. The lender assesses what the assets would realise if the business stopped trading and sets the facility against that figure.
This makes it available to companies whose trading history is short or irregular, provided they hold assets a lender can identify, value and take control of.
Advance rates reflect realisable value
Lenders advance a proportion of each asset class rather than its full book value, and the proportion varies sharply according to how easily the asset can be sold.
Receivables from creditworthy customers attract the highest proportions, finished goods considerably less, and work in progress or specialised equipment often very little.
The discount is not a judgement about the business. It reflects that a forced sale, conducted quickly by a party with no interest in the trade, realises far less than an orderly one.
Monitoring is continuous
Because the security fluctuates daily, these facilities involve regular reporting: aged receivables listings, stock counts, and reconciliations submitted at short intervals.
Lenders also conduct periodic independent inspections of stock and ledger quality, the cost of which is normally charged to the borrower.
That administrative burden is a genuine cost of the facility, and for smaller companies it can require staff time that had not been budgeted for.
Ineligible items reduce availability
Not every asset counts. Invoices past a certain age, amounts owed by related parties, disputed balances and concentrations with a single customer are commonly excluded.
These exclusions can reduce the effective facility well below what the headline advance rate implies, and the reduction is discovered after drawing begins.
Availability therefore moves with the composition of the ledger, not only its total, which makes forecasting the usable facility more complicated than a fixed loan.
Cost reflects work as well as risk
Pricing combines interest on the drawn balance with service and audit charges covering the monitoring, so the effective cost is higher than the quoted margin alone.
Structures, terminology, security requirements and the treatment of the underlying receivables differ by lender and by jurisdiction, and the legal mechanics vary between markets.
Comparing facilities therefore requires looking at the total charge against the funds genuinely available, rather than at the interest rate presented in the offer.