Using Asset-Based Lending to Fund a Scale-Up as a UK Limited Company

What asset-based lending is and how it differs from a term loan

Asset-based lending (ABL) is a revolving facility secured against a portfolio of the company's assets — typically trade debtors, stock, plant and equipment, and sometimes property. Unlike a term loan, which provides a fixed amount drawn once, an ABL facility fluctuates as the underlying asset values change. When the debtor book grows, the available facility grows with it; when debtors are collected, the availability reduces.

This dynamic structure makes ABL particularly well suited to scaling businesses, whose balance sheets expand rapidly during a growth phase. A company growing from £2m to £8m turnover in two years would find that a fixed term loan quickly becomes insufficient, while an ABL facility automatically scales with the business.

Eligibility and advance rates by asset class

Each asset class within an ABL facility attracts a different advance rate, reflecting the ease with which the lender could realise value from that asset in a default scenario. Trade debtors from creditworthy UK businesses are typically advanced at 80–85%. Stock is usually advanced at a lower rate — often 40–60% — because it requires sale to convert to cash, and the realisation value depends on market conditions. Plant and equipment is advanced based on forced-sale valuation.

The aggregate of these advances constitutes the borrowing base — the maximum amount available under the facility at any given time. Lenders recalculate the borrowing base monthly, or more frequently for larger facilities, using management information provided by the borrower. Directors who have not managed an ABL facility before should budget for the reporting burden, which is more intensive than a straightforward term loan.

When ABL makes sense over simpler instruments

ABL adds complexity and cost relative to a single-purpose facility. It makes sense when the company has multiple significant asset classes, when the combined facility size required exceeds what a single invoice finance or term loan provider would offer, or when the business needs the flexibility to draw different components at different times.

It is particularly relevant for manufacturing, distribution, and wholesale businesses where stock and plant are material alongside debtors. Service businesses with minimal physical assets typically find invoice finance alone more efficient. For a company at a meaningful scale-up inflection point — moving from £5m to £20m, for example — ABL can provide the headroom that enables that transition without equity dilution.

Negotiating and managing an ABL facility

ABL facilities are more negotiable than standard lending products. The advance rates, eligible asset definitions, reporting requirements, and pricing are all subject to negotiation, and the outcome depends significantly on the quality of the company's financial reporting, the clarity of its management information, and the strength of its relationship with the lender.

Directors should seek independent advice when negotiating an ABL facility for the first time. The documentation is complex, the covenants are detailed, and the consequences of breaching the borrowing base calculation — for example by overstating eligible debtors — can be severe. Understanding the facility fully before signing is essential.