There are many ways to finance a business. One that few business owners consider is asset-backed financing.
Many banks and credit unions offer asset-backed loans to people willing to leverage their new business’s assets to cover the costs of their acquisition. Often, buyers will finance their new business’s inventory, machinery, non-mortgaged real estate, or other tangible assets to access this fast form of funding.
Why would I choose this approach over another form of financing?
You might consider an asset-backed loan if any of the following conditions are true:
- You’ll need more capital than what you can attain from other financing sources.
- You don’t qualify for a traditional term loan.
- You don’t want to put up any personal assets as collateral for financing.
- The business you’re acquiring has assets that could be leveraged to achieve your funding goals.
Asset-backed loans often have less stringent requirements than traditional term loans. Of course, lenders may consider your financial history and personal creditworthiness. However, they’re far more interested in the value of your business assets, which they can use as collateral if you default on the loan.
How does this kind of loan work?
Lenders will determine how much money you can borrow by studying the value of your assets. Often, they allow owners to borrow up to 85% of the value of their accounts receivable and up to 50% of the value of their inventory or equipment. Depending on your preference, the lender can offer you a revolving line of credit or structure a loan for an amount that’s equal to those percentages.
Could I lose the assets that I put up for collateral?
Yes. If you default on your loan, the lender will be entitled to seize those assets, liquidate them into cash, and use the proceeds to cover their losses.
Collateral provides a safety net for lenders. Because of this, banks often consider them to be lower-risk investments. Many are more willing to provide this loanؙ than their term loan offerings.
How do I apply for asset-backed financing?
To start, you’ll need to contact banks and credit unions in your area to determine who offers this form of financing. You can also look to online banks, including GoKapital and Commercial Loan Direct, to explore lending options. Ask each institution about their payment plans, terms, and the speed of their approval process to determine who can meet your needs.
Next, you’ll gather the financial documents your preferred lender requires. These documents may include:
- The business’s balance sheets for the past two years, plus a year-to-date balance sheet
- The business’s profit-and-loss statements for the last two years and a year-to-date profit-and-loss statement
- Sales projections for the next three to five years
- Personal tax returns for the past three years and, if you’ve set up a business entity to acquire your target business, up to three years of business tax returns
- Personal banking statements for the past 12 months
.
Then, create a list of your assets and their respective values. If you’re leveraging the business’s inventory, provide an inventory statement with item count and their approximate (or appraised) value. If you’re leveraging equipment or machinery, provide documentation of each item’s age, condition, and resale value.
You’ll submit these documents and a completed loan application to the lender. The lender will ensure there are no outstanding liens on your assets by performing a Uniform Commercial Code search. They may also have your financials audited by a third-party firm to ensure their accuracy.
After an initial review, most lenders will ask for a preliminary commitment to move forward with the loan process. They may present you with a non-binding offer. This often includes the loan amount, interest rate, and terms they believe they’ll be able to provide. To move forward with the process, you’ll sign a term sheet and, in some instances, pay a due diligence fee for the bank to conduct the rest of its investigation. The remaining steps of the process will include a complete audit of the documents you provided and an in-person assessment of the materials that will serve as collateral for the loan.
If you’re approved for the loan, you’ll be presented with closing documents. Within days of signing and submitting these documents, you should receive the financing you requested.
Important note: Lenders who offer asset-backed financing may perform periodic checks on your assets to verify their value. These checks can occur at any time throughout the tenure of your loan.
.
Not sure if this form of financing is right for you? Learn about term loans, SBA 7(a) loans, seller financing, lease-to-buy financing, and other options to attain the capital you need in this guide:

What’s next?
Log into your owner’s portal for more articles and advice you can use as you complete your acquisition and begin operating your new business.