Written by Callum Bull, Director at PMD Business Finance

How asset based lending is replacing traditional SME banking facilities

For many businesses, access to funding plays an important role in supporting operations, managing cashflow and achieving growth objectives.

However, traditional funding solutions don’t always keep pace with changing business requirements. As businesses evolve, many begin exploring alternative funding options that offer greater flexibility and make better use of the assets already held within the business.

In my role advising businesses on funding strategies, one trend I’ve seen become increasingly common is the move away from traditional working capital facilities.

Many SMEs have found traditional funding routes becoming increasingly restrictive. High street banks have reduced their appetite for unsecured working capital facilities such as overdrafts, often favouring lower-risk lending models and more rigid lending criteria. As a result, businesses are increasingly exploring alternative finance structures that can provide improved access to capital and scale alongside growth.

Asset based lending (ABL) is one of the areas generating the most interest. At the same time, it’s also one of the most misunderstood.

A common misconception is that ABL is only available for corporate businesses but in reality its readily available to many SMEs. Many of the enquiries we receive come from profitable, growing businesses looking to access additional working capital, fund corporate transactions or review funding structures that may no longer be fit for purpose.

So, what exactly is asset based lending, and how does it work?

What is asset based lending?

Asset based lending is a type of business finance that allows companies to raise funding against assets already held within a business whether that’s utilising the assets within your own business or one you’re looking to acquire.

Rather than assessing funding requirements based solely on profitability or historic performance, lenders use the value of eligible business assets to support borrowing.

These assets may include:

Debtors

Stock and inventory

Plant and machinery

Commercial property

By introducing an ABL facility, businesses can access funding that reflects the value already held within their balance sheet.

One of the things I regularly discuss with clients is the amount of capital tied up within their balance sheet. Many business owners are surprised by just how much borrowing capacity existing assets can support.

How does asset based lending work?

Asset based lending is designed to provide businesses with access to working capital using assets they already own.

The amount available to borrow is typically linked to the value of eligible assets. This means funding can increase as the business grows and asset values change over time.

Unlike traditional overdraft facilities, which are often fixed at a pre-agreed limit, ABL is designed to grow alongside the business. As turnover increases, debtor books strengthen, stock levels rise or additional assets are acquired, the available funding can often increase accordingly.

This allows businesses to access a funding solution that evolves with their requirements rather than restricting growth through static borrowing limits.

ABL facilities can also be structured to bring multiple finance requirements together under one arrangement, helping businesses simplify their funding structures while improving access to capital.

In practice, this is often where businesses see the greatest benefit. I frequently speak with businesses that have expanded successfully but are still relying on facilities that were designed for a much smaller operation. In these situations, reviewing the assets already available within the business can often uncover opportunities to improve liquidity and increase funding capacity.

Why do businesses use ABL?

Businesses consider asset based lending for a variety of reasons, but the common theme is usually flexibility.

As businesses grow, increasing amounts of capital can become tied up in invoices, stock and other operational assets. While the business itself may be performing strongly, access to working capital can become constrained.

ABL provides a way to access funding against those assets, helping businesses improve liquidity and support future plans.

From my perspective, one of the biggest attractions is the ability to secure funding that more closely reflects the true strength of the balance sheet. Because lenders can take security over multiple asset classes, they are often able to provide funding against debtors, stock, machinery and property simultaneously.

This broader security position can result in significantly higher funding availability than would otherwise be achievable through conventional unsecured borrowing or overdraft-based lending.

Increasingly, we’re seeing businesses use ABL as a strategic growth tool rather than simply a source of working capital. Acquisitions, management buyouts, expansion plans and refinancing projects are all areas where these facilities can play an important role.

How are businesses using asset based lending?

Asset based lending can support businesses at a number of different stages in their journey. We’re seeing uses such as:

Supporting business growth: As businesses take on larger contracts, recruit new employees or invest in expansion, they may require additional working capital to support growth.

Funding acquisitions: Businesses pursuing acquisitions often use ABL as part of a wider funding structure to help support transaction requirements while maintaining financial flexibility.

Supporting management buyouts (MBOs): Management teams considering an MBO may incorporate asset based lending into their funding strategy to help facilitate a successful ownership transition.

Refinancing existing facilities: Businesses often use ABL to refinance existing borrowing, consolidate facilities or review whether their current funding structure remains fit for purpose.

Improving liquidity: Asset based lending can release funding tied up within existing assets, helping businesses strengthen cashflow and support future plans.

Why ABL is increasingly preferred over traditional facilities

As traditional bank lending has become more conservative, many businesses are reassessing whether their current facilities still provide the flexibility they need.

One of the conversations I’m having more frequently is with business owners whose funding facilities haven’t kept pace with the growth of their business. While turnover, assets and opportunities may have increased, their funding structure has often remained unchanged.

That’s one of the key attractions of asset based lending. Because funding is linked to the assets within the business, facilities can often grow alongside the organisation rather than being restricted by fixed borrowing limits.

We’re also seeing more businesses use ABL proactively. Rather than solving a short-term funding challenge, it’s increasingly being used to support acquisitions, expansion plans and long-term growth strategies.

What are the benefits of asset based lending?

One of the biggest advantages of ABL is that it allows businesses to make better use of the assets already sitting on their balance sheet.

In my experience, many businesses are surprised by how much working capital is tied up in debtors, stock, machinery or property, and how those assets can be used to support future growth.

Key benefits can include:

Improved access to working capital

Facilities that grow alongside the business

Potentially higher funding availability than traditional facilities

Greater flexibility to support changing business needs

Support for acquisitions, management buyouts and growth initiatives

The ability to combine multiple asset classes within a single structure

For businesses with value tied up on the balance sheet, ABL can provide a more flexible and scalable alternative to traditional funding facilities.

Is asset based lending right for every business?

There is no single funding solution that suits every organisation.

The suitability of asset based lending will depend on factors such as the nature of the business, the assets it holds, its growth plans and its funding objectives.

However, one of the questions I often ask clients is whether their current funding structure fully reflects the value within their business. In many cases, the answer is no.

For businesses with strong debtor books, stock holdings, machinery or property assets, asset based lending can provide an opportunity to access additional working capital. It can also increase funding capacity and create a structure capable of supporting both immediate opportunities and long-term growth ambitions.

Enquire about an ABL facility

Do your business would benefit from asset based lending? Or simply want us to review your current facilities to ensure they’re still fit for purpose? Please get in touch.

Asset Based Lending (ABL): A Business Guide