Asset based financing can provide businesses with access to working capital by using eligible business assets, such as accounts receivable, inventory, and equipment, as the basis for financing. For companies that may not fit traditional bank lending requirements, asset based financing can provide another way to unlock the value already on the balance sheet.

Growing a business often creates a frustrating financial contradiction:

The more business you win, the more working capital you may need.

A company can have strong sales, reliable customers, valuable accounts receivable, and significant assets, yet still experience a cash-flow gap because customers don’t pay invoices immediately.

For example, a business may complete a $250,000 project today but not collect the corresponding invoices for 30, 60, or 90 days.

The company still has payroll to meet.

Vendors still need to be paid.

New projects still require capital.

And growth itself may require additional working capital.

Traditional bank financing can be an excellent solution when the business, borrower, collateral, cash flow, and requested structure meet the bank’s requirements.

But not every business fits traditional underwriting.

That’s where asset based financing can provide another potential source of capital.

What Is Asset Based Financing?

Asset based financing is a form of commercial financing where a company’s eligible assets are used to support borrowing capacity.

Instead of relying solely on traditional measures such as historical cash flow or profitability, an asset based lender may evaluate the value and quality of assets that can support the financing.

Depending on the financing structure, eligible assets may include:

• Accounts receivable
• Inventory
• Equipment
• Machinery
• Other qualifying business assets

One of the most common forms of asset based financing is accounts receivable financing, where eligible outstanding invoices are used to support working capital.

The fundamental concept is straightforward:

A business has value tied up in its assets. Asset based financing can potentially convert some of that value into usable working capital.

How Does Asset Based Lending Work?

The exact structure depends on the lender, the assets involved, the industry, and the financial condition of the business.

For an accounts receivable-based facility, the process may generally look like this:

1. The Business Generates Receivables

The company sells products or services to customers and issues invoices.

For example:

A commercial services company completes $500,000 of work for creditworthy business customers.

The customers have agreed to pay within 30 or 60 days.

The company now has $500,000 in accounts receivable.

2. The Receivables Are Evaluated

The lender reviews the receivables to determine which invoices may qualify as eligible collateral.

Factors can include:

• Customer creditworthiness
• Invoice aging
• Payment history
• Concentration
• Disputes
• Industry
• Terms
• Existing liens or claims

3. Financing Is Made Available

Based on the eligible collateral and agreed financing structure, the lender may provide the business with access to working capital.

4. Customers Pay Their Invoices

As customers pay their invoices, the financing facility is adjusted according to the terms of the agreement.

The business can then continue using the facility as new eligible receivables are generated.

This can create a financing source that grows alongside the company’s sales.

Why Would a Business Consider Asset Based Financing?

One of the biggest advantages of asset based financing is that it can focus on what the business has, not just what traditional financial statements say the business can borrow.

That can be particularly important for companies experiencing rapid growth or temporary financial pressure.

Growth Can Create a Working Capital Problem

Consider a company that has grown from $2 million to $5 million in annual revenue.

That sounds like good news.

But growth can require significant additional capital.

The company may need to:

• Hire employees
• Purchase inventory
• Pay suppliers
• Fund larger projects
• Carry larger receivable balances
• Increase production
• Expand facilities
• Cover longer payment cycles

The company may be profitable but still have insufficient available cash to support the pace of growth.

Asset based financing may provide another source of working capital.

Accounts Receivable Financing

Accounts receivable financing is one of the most common forms of asset based financing.

It allows a business to potentially use eligible outstanding invoices as collateral for financing.

This can be particularly useful for companies that sell to established commercial customers but operate with extended payment terms.

For example:

A company has $1 million in eligible accounts receivable.

Its customers typically pay invoices within 30 to 60 days.

Rather than waiting for every invoice to be paid before accessing the cash, the company may be able to use qualifying receivables to support a working capital facility.

The result can be improved liquidity without waiting for the entire receivables cycle to run its course.

Asset Based Financing vs. Traditional Bank Financing

Asset based financing isn’t necessarily a replacement for traditional bank financing.

In many cases, it is simply another financing structure that may make sense for a particular business.

Traditional commercial lending may place significant emphasis on:

• Historical cash flow
• Profitability
• Debt service coverage
• Credit history
• Tangible collateral
• Business performance

Asset based financing may place greater emphasis on:

• Eligible receivables
• Inventory
• Equipment
• Asset values
• Customer quality
• Collateral availability
• Borrowing base calculations

The appropriate structure depends on the business and its financing needs.

Asset Based Financing vs. Factoring

Asset based financing and factoring are sometimes used interchangeably, but they aren’t necessarily the same thing.

Asset Based Financing

An asset based facility is generally structured around a borrowing base supported by eligible business assets.

Factoring

Factoring generally involves the sale or assignment of accounts receivable to a factor, which provides the business with an advance against eligible invoices.

Both approaches can provide working capital based on receivables, but their structures, costs, documentation, control mechanisms, and repayment processes can differ.

A business should evaluate the specific terms rather than choosing a financing product based solely on the name.

Who Can Benefit From Asset Based Financing?

Asset based financing can potentially be useful for businesses with substantial eligible assets but limited access to traditional credit.

Potential candidates can include:

Manufacturers

Manufacturers may have significant accounts receivable, inventory, equipment, and ongoing purchase orders.

Distributors and Wholesalers

Companies that purchase inventory and sell to commercial customers may experience significant working capital requirements.

Staffing Companies

Staffing firms often pay employees before receiving payment from their customers, creating a natural working capital gap.

Government Contractors

Government contractors may complete work and invoice customers while waiting for payment.

Construction Companies

Contractors can experience substantial gaps between project expenses, payroll, materials, and customer payments.

Transportation and Logistics Companies

Companies with recurring invoices and substantial operating expenses may need additional liquidity to support growth.

Professional Services Firms

Consulting, engineering, technology, and other professional services businesses can accumulate significant receivables while waiting for customers to pay.

The important consideration isn’t simply the industry.

It’s the quality and availability of the underlying assets and the company’s overall financial circumstances.

When Traditional Financing Isn’t Enough

Businesses sometimes seek asset based financing after encountering difficulty with traditional financing.

That may happen because:

• The company is growing faster than its balance sheet
• Cash flow doesn’t meet conventional lending requirements
• The business has limited hard collateral
• Existing debt limits additional borrowing
• The company has substantial receivables
• The business is recovering from a temporary financial disruption
• The company has significant working capital needs
• The bank’s credit parameters don’t fit the transaction

A bank decline doesn’t necessarily mean the company has no financing options.

It may mean the business needs a different financing structure.

Asset Based Financing for Businesses With Strong Receivables

One of the most important questions for a business considering asset based financing is:

Who owes you money?

Not all accounts receivable have the same financing value.

A lender may look at:

• Customer credit quality
• Aging
• Payment history
• Concentration
• Disputes
• Contract terms
• Industry risk
• Dilution
• Existing liens

For example, $1 million in receivables from a diversified group of financially strong commercial customers may present a very different financing opportunity than $1 million concentrated among a handful of slow-paying customers.

That’s why asset based financing isn’t simply about the amount of receivables on the balance sheet.

The quality of the receivables matters.

How Much Can a Business Borrow?

There isn’t one universal advance rate or financing amount for every business.

Available financing depends on factors such as:

• Type of assets
• Asset quality
• Accounts receivable aging
• Customer creditworthiness
• Concentration
• Industry
• Business performance
• Existing liens
• Borrower credit
• Financing structure
• Lender requirements

For accounts receivable financing, the lender generally determines which receivables qualify and establishes the borrowing base accordingly.

That means a business shouldn’t assume that having $1 million in accounts receivable automatically means it can borrow $1 million.

The financing amount depends on the eligible collateral and the specific facility.

What Are the Benefits of Asset Based Financing?

For the right business, asset based financing can provide several potential advantages.

Access to Working Capital

Businesses may be able to unlock capital tied up in receivables or other assets.

Financing That Can Support Growth

As eligible receivables increase, borrowing capacity may increase as well, subject to the facility’s terms.

An Alternative to Traditional Credit

Businesses that don’t fit conventional bank lending requirements may have another financing option to evaluate.

Liquidity Without Waiting for Customers

Businesses can potentially access working capital before customers pay outstanding invoices.

Financing Based on Business Assets

The financing structure can focus heavily on the company’s underlying collateral rather than relying exclusively on historical profitability.

What Are the Considerations?

Asset based financing isn’t right for every business.

Businesses should carefully evaluate:

• Financing costs
• Fees
• Advance rates
• Reporting requirements
• Collateral monitoring
• Eligibility requirements
• Customer concentration
• Contract terms
• Personal guarantees, where applicable
• Existing liens
• Minimums or other facility requirements

The right financing structure should support the business rather than create an additional burden.

That’s why understanding the entire financing arrangement is important before moving forward.

Asset Based Financing for a Growing Business

One of the most interesting applications of asset based financing is a company that is growing faster than its traditional financing capacity.

Imagine a company that has increased annual sales from $5 million to $10 million.

Its customer base is expanding.

Its invoices are increasing.

Its order volume is growing.

But now the company has a new problem:

It has to finance the growth before it collects the revenue.

Payroll increases.

Inventory requirements increase.

Vendor obligations increase.

Accounts receivable increase.

The company may appear successful on paper while experiencing increasing pressure on its available cash.

Asset based financing can potentially provide the liquidity necessary to bridge that gap.

Asset Based Financing for a Business That Has Been Declined by a Bank

A traditional bank may decline a business loan for many reasons.

The bank may determine that:

• Cash flow isn’t sufficient
• Collateral doesn’t meet requirements
• The loan structure isn’t appropriate
• Existing exposure is too high
• The business falls outside its current lending appetite

That doesn’t necessarily mean the business has no financing options.

A second look can help determine whether the company’s assets provide another potential source of borrowing capacity.

For businesses with substantial accounts receivable, A/R financing or factoring may be worth evaluating.

Working With Greenwood Capital

Greenwood Capital helps businesses evaluate commercial financing solutions based on their individual circumstances and capital requirements.

For companies considering asset based financing, Greenwood can review opportunities involving accounts receivable and other qualifying business assets.

The process begins with understanding the business.

That means looking at:

• Why the business needs capital
• How much financing is required
• What assets are available
• Who the company’s customers are
• How quickly customers pay
• Current debt
• Existing liens
• Revenue and operating history
• The company’s growth plans

From there, the financing structure can be evaluated based on the actual circumstances of the business.

Is Asset Based Financing Right for Your Business?

Asset based financing may be worth exploring if your business:

• Has significant accounts receivable
• Sells to established commercial customers
• Has customers paying on 30-, 60-, or 90-day terms
• Is growing rapidly
• Needs additional working capital
• Has limited traditional collateral
• Has been declined for conventional bank financing
• Needs liquidity to support larger contracts
• Has significant inventory or equipment
• Wants to unlock capital tied up in its balance sheet

It may not be the appropriate solution for every company.

The best way to determine whether it fits is to evaluate the business, its assets, its customers, and its financing objectives.

Don’t Let Your Balance Sheet Hide Your Borrowing Capacity

A company’s balance sheet can tell an important story.

But sometimes the most valuable assets aren’t sitting in a bank account.

They may be sitting in:

Invoices waiting to be paid.

Inventory waiting to be sold.

Equipment supporting production.

Contracts generating future revenue.

Asset based financing can provide a way to evaluate those assets as potential sources of working capital.

For businesses that don’t fit traditional lending structures, that can create another path to the capital needed to operate, grow, and take advantage of new opportunities.

Need Working Capital? Let’s Look at What Your Business Already Has.

If your company has substantial accounts receivable or other qualifying business assets, Greenwood Capital can review your situation and help determine whether asset based financing may be appropriate.

Don’t assume a traditional loan is your only option.

Let’s look at the assets behind your business and determine what financing possibilities may exist.

Request a Financing Review