Asset-based lending

Asset-based lending is a business loan secured by collateral (assets). The asset-based loan, or line of credit, is secured by inventory, accounts receivable, equipment, and/or other balance-sheet assets owned by the business.

Overview

Asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset is taken. In this sense, a mortgage is an example of an asset-based 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.

Asset-based lending is also usually done when a normal route of access to capital is not available, such as the capital markets or bank borrowing. Because of this, the interest rates for asset-based lending are higher than those found in the capital markets or bank lending.

Types of Asset-Based Lending

There are several types of asset-based lending:

• Accounts Receivable Financing: This type of asset-based lending allows businesses to use their accounts receivable as collateral in a financing agreement. The company receives an amount that is equal to a reduced value of the receivables pledged. The age of the receivables has a large effect on the amount a company will receive. The older the receivables, the less the company can expect.

• Inventory Financing: This type of asset-based lending allows companies to use their inventory as collateral for a loan. The loan is used to purchase inventory, and the inventory purchased serves as collateral for the loan.

• Equipment Financing: This type of asset-based lending involves a loan to purchase equipment. The equipment itself serves as collateral for the loan.

Benefits and Risks

Asset-based lending offers several benefits to businesses. It provides a source of capital for companies that may not have access to other sources. It also allows companies to finance growth, particularly if they can grow without significantly increasing their fixed costs.

However, asset-based lending also carries risks. The lender has the right to seize the assets if the borrower defaults on the loan. This could potentially result in the loss of critical assets.

See Also

• Commercial lending
• Secured loan
• Unsecured loan
• Factoring (finance)