What is '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.

Asset-based lending is also known as "commercial finance" or "asset-based financing."

BREAKING DOWN 'Asset-Based Lending'

Businesses usually take out loans to meet various cash flow needs, for example, meeting payroll or building inventory. When a company cannot show that it can pay for a loan through its cash flows, the lender may decide to approve the loan based on the value of the entity’s assets. This form of business financing is referred to as asset-based lending.

Asset-based lending occurs when a loan is granted to a firm solely on the value of assets pledged as collateral. The terms and conditions of an asset-based loan depend on the type and value of assets offered as security to the lender. Lenders usually prefer highly liquid securities that can readily be converted to cash in situations where the borrower defaults on its payments. In general, the more liquid the pledged asset, the higher the loan-to-value ratio. In addition, loans that are granted under asset-based financing are never the full value of the assets pledged.

For example, say a company seeks $200,000 in loans to expand its business operations. If the company decides to pledge its highly liquid marketable securities on its balance sheet as collateral, the lender may grant 85% of the face value of these assets. This means that if the firm’s marketable securities are valued at $200,000, the lender will be willing to loan $170,000. If the company, however, chooses to pledge less liquid assets such as real estate, finished inventory or equipment, it may secure only 50% of its required financing.

Interest rates on these loans, as you can imagine, are lower than interest rates on an unsecured loan or line of credit because if the borrower defaults, the lender has the ability to seize assets and sell them in an attempt to recoup its lending costs. The lender's interest is secured by the assets of the borrower, which also determine how large of a loan a company can access. The interest charged on an asset-based loan is determined by the size of the loan, and ranges from 7% to 17%, expressed as an annual percentage rate (APR).

Companies employ asset-based lending for a number of reasons. The cost of issuing shares or bonds in the capital markets may be too high. Also, a firm may not be able to raise capital through the securities market if it needs immediate funding for a time-sensitive project such as a merger, acquisition, inventory purchase, etc. If getting unsecured financing proves to be challenging, a business may opt for asset-based lending. Companies that take asset-based loans usually have cash flow problems that stem from rapid growth. Small and mid-sized companies that are stable and that have assets to be financed are common asset-based borrowers.

The assets used in asset-based lending are not normally pledged as securities for other loans. If they are pledged to another lender, the other lender must agree to subordinate its position.

RELATED TERMS
  1. Asset-Based Finance

    Asset-based finance is a loan made to a company that is secured ...
  2. Asset Financing

    Asset financing uses a company’s balance sheet assets, including ...
  3. Asset-Based Approach

    Asset-based approach is a type of business valuation that focuses ...
  4. Unsecured Loan

    An unsecured loan is a loan that is issued and supported only ...
  5. Secured Note

    A secured note is a type of loan that is backed by the borrower's ...
  6. Loan

    A loan is money, property or other material goods that is given ...
Related Articles
  1. Small Business

    Lending Clubs: Better Than Banks?

    If you need to borrow money and your credit is making it tough, this new option may be just what you're looking for.
  2. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  3. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  4. Retirement

    10 Ways to Borrow in Retirement

    Before you take money from your nest egg, consider these 10 other ways to borrow in retirement.
  5. Personal Finance

    Should You Take Out A Personal Loan to Family?

    Find out how loaning cash to family or friends can put a strain on your relationship and your bank account. Learn how to properly make family loans safe.
  6. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  7. Personal Finance

    Can't Get A Bank Loan? Turn To Your Neighbor

    Peer-to-peer lending can be an inexpensive way to gain access to credit when banks are restricting lending. Understand how it works before jumping in.
  8. Tech

    What Goldman Sachs’s Online Lending Means For Banking

    Recently Goldman Sachs has announced its entry into the online lending space. Most commonly known as an investment bank, Goldman’s newest venture may provide insight into the future of online ...
  9. Managing Wealth

    How To Get A Business Loan If You Have Bad Credit

    Your business' credit standing may be less than stellar, but you can still get financing. We show you how.
  10. Personal Finance

    Personal Loan Rates: 6 Ways to Find the Best Deals

    Terms can vary tremendously, so you better shop around, both in person and online.
RELATED FAQS
  1. What is the difference between secured and unsecured debts?

    Learn about the differences between secured and unsecured debt — and how banks buffer risks associated with each type of ... Read Answer >>
Trading Center