What is asset-based finance?

The lender starts with the assets. It works out which receivables, stock, equipment or property are eligible, applies a haircut to reflect what it could realise in a sale, and multiplies each eligible class by an advance rate. Add those up, subtract ineligible items such as overdue or disputed invoices, and you have the borrowing base. Collateral is revalued monthly or quarterly, so the limit moves with your ledger and stock.

The lender then takes security. Personal property such as receivables, inventory, plant and vehicles is covered by a security interest on the Personal Property Securities Register. Land sits outside the PPSA, so commercial property needs a mortgage registered with the state land titles office. Controls commonly include blocked accounts or direct debit arrangements, rights to inspect and run stocktakes, retention of title over financed stock and sometimes a notice to customers or an assignment of the debts. A covenant breach, insolvency event or material adverse change lets the lender enforce and sell the secured assets.

Receivables finance uses your debtor ledger, ranging from confidential invoice discounting to full factoring, where the lender runs collections. Inventory finance advances against stock, with lower advance rates for seasonal or slow-moving lines. Equipment finance and fleet finance are secured against machinery, trucks and vehicles. Commercial property can secure a larger facility or lift the advance rates on other asset classes.

A sale-and-leaseback sells an owned asset to a financier and leases it back, releasing cash while you keep using the asset. Hybrid facilities combine receivables, inventory and equipment under one borrowing base, sometimes layered with a term loan or a mezzanine tranche. Rapidly depreciating consumer goods, most intangibles such as goodwill, and goods subject to third-party liens or consignment are usually excluded.

Pricing has several layers: interest at a margin over a base rate, facility or commitment fees on the undrawn limit, monitoring and administration fees, stocktake and valuation fees, and legal costs for security documents and PPSR registrations. Establishment and break fees may also apply. Compare the all-in cost rather than the headline margin.

Lenders look for predictable turnover, a diversified debtor mix with few overdue accounts, marketable equipment, sound invoicing and stock systems, clear title with adequate insurance, and up-to-date tax lodgements. Many set a minimum annual revenue. ABF suits businesses that want a facility tied to turnover, whether for seasonal stock, growth capital or ongoing working capital. The trade-offs are the reporting burden, lender controls that can touch customer and supplier arrangements, and the risk of losing key assets if covenants are breached.