Asset-Backed Lending for Growth-Stage Companies

The short answer: Asset-backed lending is borrowing against things your company already owns, such as receivables, inventory or equipment. It can provide flexible working capital without giving up equity, but it works only when you have real assets and predictable cash flow to support the debt.

What counts as an asset

Lenders typically look at accounts receivable, inventory, machinery and equipment, and sometimes real estate or intellectual property. Each is valued differently. Receivables from creditworthy customers are often easier to lend against than specialized inventory, which may be hard to resell. The more liquid and easy to value an asset is, the more comfortable a lender will be.

How it usually works

The lender sets a borrowing base, a formula that links how much you can draw to the value of the eligible assets. As receivables are collected or inventory is sold, the available amount changes. The lender takes a security interest in the assets and may monitor them through regular reporting. In Canada, security is generally registered under provincial personal property security legislation, and your lawyer can explain how that applies to you.

Why growth-stage companies use it

• Funding for growth is available without selling more of the company.
• Borrowing capacity grows as the business and its assets grow.
• It can smooth cash flow where customers pay slowly.
• It often costs less than equity if the business performs.

What to watch

Debt must be repaid. If sales slow, the borrowing base can shrink just when you need cash most. Lenders may require covenants, reporting and a claim on key assets, which can limit your flexibility and complicate later financing. Existing security can also affect equity investors, since a new investor will want to know what is already pledged. Read the terms closely, and ask what happens if you breach a covenant.

Where it fits in your plan

Think of asset-backed lending as a complement to equity, not a substitute. Equity funds the work that has no collateral, such as research, hiring and market entry. Asset-backed debt funds the working capital and hard assets that come with scaling. A sensible plan matches each type of capital to what it is best at funding, and keeps total obligations manageable.

Before you borrow, build a simple cash flow forecast, test it against a slow quarter, and confirm you could still meet payments. Because secured lending has legal and tax consequences, work with a qualified lawyer and accountant.

Planning your next stage of growth capital?

Launch Capital is a Toronto venture capital firm and family office that provides growth capital to Canadian technology companies. We are operators who have built and exited companies, and we are happy to talk about how debt and equity can work together. If you are building something real, send us your pitch. It takes two minutes and no deck is required.