Asset Based Lending - The Bigger Picture Behind Invoice Finance

Asset based lending (ABL) is a funding package where you borrow against the assets your business already owns: unpaid invoices, stock, plant and machinery, or property. Invoice finance is the most common component - it sits inside over 90% of ABL facilities. Think of ABL as invoice finance plus extras. If you only need funding against your invoices, you just need invoice finance. If you want to unlock cash from other assets too, ABL is the bigger package.

What Assets Can You Borrow Against?

The invoice finance element does the heavy lifting. In most ABL facilities, invoices provide 60-80% of the total funding. Stock and other assets top it up. This is why most ABL providers are also invoice finance specialists - the invoice element is the engine.

Do You Need ABL or Just Invoice Finance?

Who Provides ABL in the UK?

ABL is typically offered by the larger providers because it requires expertise across multiple asset classes, not just invoices:

• •Lloyds Commercial Finance - the largest UK ABL provider by volume
• •HSBC Invoice Finance - strong on larger, multi-asset facilities
• •Close Brothers - good for mid-market ABL (£1m-£25m turnover)
• •Aldermore - challenger bank with growing ABL capability

Most businesses searching for "asset based lending" actually just need invoice finance. If that sounds like you, start with our how invoice finance works guide instead - it is simpler, faster to set up, and available at lower turnover levels.

The ABL Funding Stack - How the Facility Is Built

How an ABL Facility Is Priced

ABL pricing has four main components. The service fee covers ledger management and admin. The discount or interest charge is the cost of the funds drawn. The arrangement fee is paid up front. And ongoing monitoring fees cover audits and reporting.

• •Arrangement fee - 0.5% to 1.5% of the total facility, typically £10,000 to £75,000 for a mid-market deal
• •Service fee - 0.1% to 0.5% of turnover funded, charged monthly on the invoice finance element
• •Discount / interest - Bank of England base rate plus 2% to 5%, charged on the drawn balance day by day
• •Audit fees - £4,000 to £8,000 per quarterly audit, billed to the borrower
• •Minimum monthly charges - a fixed floor payable even when you do not draw

A £10 million turnover business on ABL will typically pay £80,000 to £150,000 a year in total costs across service, discount, arrangement, and audit fees. The same business on standalone invoice finance usually pays £40,000 to £90,000 a year, but with less total funding unlocked.

Covenants, Reporting, and the Audit Regime

ABL is materially more demanding than standalone invoice finance. Expect the following reporting cadence:

• •Weekly - aged debtor report uploaded to the lender portal
• •Monthly - management accounts, cash flow forecast, stock report
• •Quarterly - external audit visit, covenant test (EBITDA, net worth, concentration)
• •Annually - full facility review, signed accounts, renewal decision

Typical covenants include a minimum tangible net worth, a minimum EBITDA to interest ratio, a cap on concentration (no single customer above 25-30% of the ledger), and a cap on dilution (credit notes and write-offs below 5% of turnover). Breaching a covenant gives the lender the right to step in, reduce advance rates, or withdraw the facility.

This is the reason most sub-£5 million businesses stay with standalone invoice finance. The reporting overhead of ABL can consume a full-time finance role, and the covenants limit how the business is run. Below that size, the extra funding rarely justifies the admin.

Worked Example - £12 Million Manufacturer

A Midlands-based engineering manufacturer turning over £12 million with £2.4 million of stock, £1.8 million of plant, and a £1.5 million freehold factory refinances an ageing bank overdraft into a full ABL facility. The structure looks like this:

Standalone invoice finance on the same business would have unlocked roughly £1.87 million. ABL unlocks £5.1 million. The manufacturer uses the headroom to fund a factory extension, buy out a departing shareholder, and retire the overdraft in one go. Total cost of the ABL facility is around £180,000 a year - around 1.5% of turnover.

When to Refinance Out of ABL

ABL is a growth tool, not a forever home. Most businesses eventually move off ABL into one of three places:

• •Down to invoice finance only - once stock and property loans are repaid, the business reverts to a simpler standalone invoice finance line
• •Up to a term loan plus revolving credit facility (RCF) - once profitability is steady, cheaper unsecured options open up at high street banks
• •Into private credit - larger businesses (£30 million+ turnover) sometimes refinance into private credit or debt fund facilities which have looser covenants

Plan the exit at the point you sign the ABL. Build refinance headroom into the business plan and test covenant compliance quarterly. Most ABL problems show up at renewal, not during the first 12 months.

Common Mistakes When Negotiating ABL

Businesses that end up unhappy with ABL almost always made one of these four mistakes at the negotiation stage. Flag them before you sign.

• •Agreeing headline advance rates without checking concentration sub-limits. An 85% advance on the ledger can drop to 50% overnight if a single customer exceeds 25% of the total. Model the concentration rules against your actual top five debtors before you sign.
• •Accepting property valuations that ignore short-lease risk. Lenders advance against property on a 180-day forced sale valuation. If your lease has under 10 years remaining, the advance can be half the open-market figure. Ask for the valuation assumptions in writing.
• •Under-negotiating termination fees. Standard ABL contracts charge 2-3% of the facility as an early termination fee for the first two years. Push for a step-down structure and a carve-out for refinance to a regulated bank. Unrestricted exit fees quietly cost six figures on a £10m facility.
• •Missing the covenant baseline. Covenants are set from your last signed accounts. If you took a one-off hit (restructuring cost, bad debt write-off), that becomes the baseline unless you successfully argue for an EBITDA add-back. Challenge it at term sheet stage, not after signing.

Asset Based Lending FAQ