How asset-based financing works for growing businesses
Dr. Heise-Rotenburg

Published on July 15, 2020


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It’s my pleasure to explain in detail a financing instrument that I think not many executives consider when setting out their business plan.

For most founders (or soon-to-be founders), venture capital is the holy grail. But there are plenty of instances where this route isn’t going to be the best fit. Or more accurately, where it isn’t going to be cheap or substantial enough.

To build a company with lots of expensive physical assets, you’ll need a lot of capital up front. So if you can get a loan using those very same assets as collateral, those assets pay back the loan with the money they bring in. Which is essentially asset-based financing in a nutshell.

This post explores the ins and outs of asset-based financing for startups, to show you why it makes so much sense for companies like ours and whether it might be a good fit for yours.

So let’s start with a few details about Cluno.

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Cluno - car subscription services

Cluno is a mobility startup that was founded in 2016 in Munich, and went live in 2017. It’s the first independent car subscription provider in Germany. We offer customers mobility. They book a car with us for a minimum term of six months, and all those little details and costs that come with owning a car - registration, insurance, radio license fee, wear and tear, and tire changes - are covered by the monthly subscription fee.

I joined in 2018. We had around 300 customers and 25 employees at the time. Now we’re over 100 employees, and my team is now over 20. One of our major milestones was reaching over €****140 million in refinancing last September - and it’s grown since. And we’re prepared for a massive scale-up this year and into next.

We work together with a range of 14 OEMs (original equipment manufacturers), which means we have a wide variety of makes and models available for our customers. And, of course, we need to refinance all of those cars. That can be done in multiple ways.

We lease some cars with OEM leasing companies - which is very common and not terribly interesting from a finance perspective. We also buy some cars using various forms of credit and factoring finance.

But mainly, we use asset-based finance in SPE (special purpose entity) structures. This is pretty common in leasing and car financing. There are big programs like the VW Driver Facilities, or BMW Blue Skies. But it’s very uncommon that a startup only two years old would be able to make this happen.

What is asset-based financing?

Asset-based financing is where you receive a credit or loan from a bank, granted against your assets and their cashflows, and not against the company itself. So there’s not the risk of having the bank loan secured against the company. The risk exists in the asset, and maybe also in the usage of the asset.

For us in the car business, that means that all those cars are transferred to an SPV (“special purpose vehicle”) which is a separate legal entity. “Vehicle” here has nothing to do with cars - it simply means that we create a new company separate from ourselves, to limit liability.

That separate legal entity has ownership of the cars, along with all those customer contracts. The bank knows that the assets in question are car subscriptions to individuals, and that those individuals will pay a certain amount for a fixed term (or longer).

The bank knows that the asset has an inherent value. They know our purchasing conditions, and there are data providers that give a second opinion. Based on that, the bank generates an interest rate that is very attractive.

So we have our financing - non-diluting, unlike equity - and the capital we need to build and grow the business.

Advantages for growing businesses

First, there’s access to funds, obviously. But every installment in this series is about financing.

The asset-based route does have a few distinct positives for companies like ours, though.

It uses credit

One advantage to us - compared with leasing - is that it’s still a credit. If for any reason we want to repay the credit - let’s say one particular car has an accident, or if we want to refinance our whole portfolio because we find a better rate elsewhere - there is no additional cost.

If you refinance that car with leasing or factoring, there would be additional costs. And those would probably kill the unit economics on their own.

And of course, we’re not diluting shares in the company. The bank doesn’t own any part of the business itself. When you have existing financiers and investors already, that’s hugely important.

Competitive interest rates

One key difference from some other financing instruments is the interest rate. Common credit financing for startups - mostly venture debt - might include 10% or more in interest. That would kill the unit economics of our model. We need cheaper financing, and asset-based refinancing is a way to reach it.

Conversely, it’s pretty common to be at around 4% for structures like ours. There is a certain risk involved in car financing. Cars can lose value. And customers have some default risks too. And it was a great thing for Cluno as a small startup to be able to get this value.

Term flexibility

We’ll talk about how much time and effort goes into setting up asset-based credit shortly. This is significant, and is definitely a disadvantage.

But the positive side of this is, once it’s up and running, it’s very easy to extend contracts or take on more finan****cing partners. If another bank wants to match the conditions we’ve been given by our current bank, it’s all set up. We can just use the same legal documents, covenants, and reporting we already have in place.

So in the long term all that work can really pay off.

Disadvantages with this approach

I’m a big fan of this approach, clearly. But it’s not all rosy. Here are a few things to be aware of if you’re ready to test out asset-based financing.

Major time and money up front

It takes a lot of time and effort - including legal effort - to build this structure. And that’s very expensive, obviously. For example, it’s very common that the company receiving credit pays their own lawyer to draft the documents, but also the bank’s lawyer. That’s just the way it is.

But we’re also usually talking about large sums. At Cluno, we closed our deal for €50 million. So those legal fees, although pretty high, might not even be as high as a small increase in our interest rate.

Even so, you have to pay these fees up front, which can be pretty heavy for a startup. And of course in Germany, it all has to be notarized. So that’s more time, effort, and money.

Banks are generally looking at the same sorts of factors as equity investors would. They look closely at the business model and the team. For us, it helped tzat I had worked in the banking industry for 10 years, and my colleague had worked for a major OEM on transactions like these.

But even with these advantages, we started the round in September 2018, and we closed it in September 2019. So it's not quick.

There are also a lot of covenants to be met. We have to give a full report of all assets every month. Credit analysts come to Cluno and check how we conclude contracts, how we pay invoices related to the cars, how we book entries in our accounting system, and whether those things are all valid, recognizable, and auditable.

These might not be processes that the usual startup would have in place. These things take so much time and effort and not every startup has the skills from the beginning.

We knew we had to do it in order to get this credit. So we set it up 99% perfect from the beginning of Cluno, because it was simply a necessity. If someone wanted to do this for the first time - with processes that weren’t very stringent - I guess they would have to do an internal data collection phase to later hand off to the banks. You have to have an insolvency policy, a collection policy, and all sorts of extra documentation.

So again, it’s a huge upfront effort and expense. But once it’s set up, everything is much easier. Today it just runs automatically. But a data engineer had to commit weeks to setting up the database - just working on that one topic. So it’s a serious commitment.

Who should consider asset-based financing?

Generally speaking, this instrument works for companies with assets that are used to generate income streams. It must be a tangible asset, and it must generate some cash back over time.

It’s not only applicable to cars. Take the company Grover, which offers tech subscriptions. You can get your Airpods or a new drone with them as a sort of lease. They use a similar structure to ours to refinance their tech equipment.

You could even do it with real estate, for example. That’s mostly done with very professional providers, and usually over the long term. Institutional investors look to invest their money for 30 years or more. But the principles are the same.

In essence, if you have valuable assets that bring money into the business, asset-based financing may well make sense. But as we’ve seen, this requires a lot of work at the outset, and it really pays to have someone on the team who’s been there, done that.


While not suitable for every business, asset-based financing provides a real opportunity for companies to acquire revenue-making resources without paying massive upfront costs. Which may be news to many founders, who felt that raising capital through equity was the only way.

As we’ve seen, this approach requires an enormous level of diligence from the beginning. You need to understand what banks will require from you, and put processes in place to answer every question they have quickly.

But when executed successfully, asset-based finance gives you the capital you need, without losing precious ownership of your business.

And that’s almost always worth the effort.

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Dr Veronika von Heise-Rotenburg is CFO of Cluno, a car subscription service that lets users pay to use a car for a minimum of six months, with all costs except gas covered by a monthly fee. Before this role, Dr von Heise-Rotenburg served in financial leadership for several leading automotive companies, with significant experience in risk management and procurement as well as with McKinsey for banking projects during the financial crisis of 2008/2009.