A recent article in the Wall Street Journal explores how businesses move from traditional cash-flow and balance-sheet lending to asset-based lending because of flexibility.

As the economic landscape evolves, businesses find innovative ways to secure capital and maintain stability. This is where asset-based financing becomes a valuable tool. Financial institutions typically see an increase in asset-based lending during economic turmoil or when interest rates increase. This is because standard lines of credit have covenants regarding cash flow and income statements. In contrast, asset-based loans sometimes have to meet different leverage and performance requirements based on a company’s cash flow, per the WSJ. “With interest rate pressure – the longer that goes on, it creates pain points for companies and challenges, and we could see a greater migration from cash-flow loans to asset-based,” per Kurt Marsden, Head of Asset-Based Lending at Wells Fargo. Businesses can unlock additional funding using a company’s tangible or intangible assets as collateral. Total asset-based lending increased by 9% in 2021 and an extra 10% in 2022 to over $500 billion, according to SFNet.

Asset-based and cash-flow loans are two distinct financing options businesses can use to meet their needs, each with its characteristics, benefits, and considerations. The choice between them depends on the situation and objectives of the company. Asset-based lending allows companies to address working capital and handle cash flow fluctuations more smoothly. Twin River Paper CFO Tyler Rajeski said, “Financial covenants on your cash flow can restrict you” because they don’t provide the flexibility of asset-based lending. Using a company’s assets to increase or fund daily activity, liquidity, and not covenants can determine success. Ryan Mulcunry, managing director at B. Riley Financial, put it more precisely, ” We’re in a world where additional liquidity is very important.”

In these high-rate environments, financial institutions offering asset-based lending can see this as an opportunity for growth, as these businesses must be resourceful in their financial strategies. Leveraging assets to secure capital represents a valuable tool that is a win-win for both asset-based lenders and businesses alike.