In the simplest meaning, asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repayed, the asset is taken. In this sense, a mortgage is an example of an asset-backed loan. More commonly however, the phrase is used to describe lending to business and large corporations using assets not normally used in other loans. Typically, these loans are tied to inventory, accounts receivable, machinery and equipment, but they can also include exotic things like the value of pharmacy script files, a trademark, or whole assets of intellectual property.

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Compared with a conventional overdraft, invoice finance typically allows you to release more funds and the interest charges are in general lower.

With a business loan, your company needs to be able to generate enough cash from the outset to make repayments, and it will probably be secured against company assets such as property. As MBOs and MBIs often trigger a shift in strategy – perhaps an aggressive expansion plan or taking a risk on new markets – large loan repayments can drain your finances at the very time you most need them.

Invoice finance requires no monthly repayments, meaning your operations are not at risk of disruption if finances become tight. It’s also attractive in the case of firms that are already fully extended and don’t want to borrow further against their property or have not filed enough years’ accounts to be eligible for a loan.

Another option is business angels or private equity investments, in which an individual or group inject funds into your company in return for shares – effectively diluting your ownership of the firm you’re trying to buy.

Particularly in the case of private equity, the new investor will often expect to have considerable influence over your company’s future direction. This can be a good thing – having access to their expertise could help drive profits – but for many managers the whole point of the MBO is to take the reins and put long-harboured plans into action.

Invoice finance lets management retain maximum equity – and hence control - in the firm.
You could also approach a non-commercial lender such as a regional development agency. The upside is that interest rates are lower than with banks, but to succeed in your application you’ll have to prove you’ve already tried every other avenue.

Ultimately, most MBOs and MBIs involve several layers of finance – especially for larger firms - and many managers combine their own cash with an overdraft, business loan and private equity.