Based on the name of the loan itself, I can guess that the lending might have something to do with having an asset to secure a loan.
According to the Wikipedia definition, “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, the different types of asset-based loans include accounts receivable financing, inventory financing, equipment financing, or real estate financing. Asset-based lending in this more specific sense is possible only in certain countries whose legal systems allow borrowers to pledge such assets to lenders as collateral for loans (through the creation of enforceable security interests)”.
Basically, asset-based lending is a loan that an asset or group of assets secures. It is the type of secured loan that either businesses or individuals can use to obtain a line of credit or borrow funds. However, for the loan to be approved, the borrower must first use their asset as collateral, meaning the lender will take possession of the asset should the loan not be paid on time.
With an asset-based lending process, usually it’s more straightforward than other types of lending because the lender is not necessarily concerned with the borrower’s creditworthiness or any other financial statements. Alternatively, the lender assesses the asset’s value and provides a loan amount to the borrower based on the value they determine.
For businesses or individuals who need quick access to funds, asset-based lending is an excellent option since the process is quick and relatively straightforward. Additionally, the process is a good option for those high-risk borrowers or people with poor credit as the loan is, as we mentioned, secured by the asset.
Moreover, an asset-based loan can provide business owners with the flexibility to use the funds for purposes such as:
- Purchasing inventory
- Making repairs
- Investing in capital improvements
- Debtor-in-Possession (Chapter 11 and SubChapter 5 bankruptcies)
Asset-based lending for individuals
Asset-based lending for individuals is becoming increasingly popular, as it allows borrowers to access funds without relying on traditional forms of credit. This type of lending is ideal for those with poor credit or no credit history, as the value of an asset secures the loan.
The most common ways homebuyers finance home purchases are with mortgages. A mortgage is a legal encumbrance on the property –a loan for which property is the collateral—the lender loans money that must be paid back, with interest, over a set period.
Another highly common form of asset-based lending for individuals is a car loan. With a car loan, the borrower can use their vehicle as collateral for the loan. The lender will assess the vehicle’s value and provide a loan based on that value. The loan is then repaid, with interest, over a set period.
Home equity loans are also a prevalent form of asset-based lending for individuals. When it comes to a home equity loan, the borrower can obviously use their home as collateral. The lender will assess the home’s value and provide a loan amount based on that value. The loan is then repaid, with interest, over a set period of time. For example, I recently paid off a home equity loan by refinancing my mortgage. I paid off the home equity and bought out the ex-husband through refinancing.
Lastly, another popular form of asset-based lending for individuals is a loan against a savings or investment account like an IRA or a high-yielding CD. With a loan against a savings or investment account, the borrower can use their account as collateral for the loan. The lender will assess the account’s value and provide a loan amount based on that value. The loan is then repaid, with interest, over a set period of time.
Asset-based lending for individuals is becoming increasingly popular, as it allows borrowers an opportunity to access funds without relying on traditional forms of credit. By using an asset as collateral, the borrower is able to receive a loan without having their creditworthiness assessed. This type of lending can be an excellent option for those with poor credit or no credit history.
Types of asset-based loans
Typically, the different types of asset-based loans include but are not limited to:
- Accounts receivable financing
- Inventory financing
- Equipment financing
- Real estate financing
The most common types of assets used in asset-based lending are:
- Real estate
- Inventory
- Accounts receivable
- Equipment
Asset-based lending requirements
When applying for an asset-based loan, borrowers must provide the lender with a detailed list of their collateral assets. The lender will then assess the market value of each asset and provide the borrower with a loan amount.
Isn’t it interesting how the two above lists look similar? It certainly is noteworthy to highlight how the two lists of asset-based loans and assets used to secure the loan are similar. Probably because the loan is based on the asset’s value and by using a specific asset as collateral, the borrower is essentially trading the asset for the loan. Then, the lender uses the asset’s value to determine the loan amount they are willing to provide and take a risk with.
The similarity between the two lists also speaks to the importance of selecting the right asset when applying for an asset-based loan. The asset’s value is the key factor in determining the loan amount, so it is essential to ensure it is selected wisely.
Asset-based lending for commercial real estate
Commercial real estate asset-based lending is typically used for larger projects and investments that require significant capital. For example, a business owner may use this type of loan to finance the purchase of a commercial property or to fund a major renovation or expansion project.
Another example would be if a business owner is looking to borrow money to purchase inventory, they might choose to use the said inventory as collateral, as it is easier for the lender to assess the value of inventory than it is for them to assess the value of a piece of real estate.
The same similarity between the two lists above further highlights the importance of accurately assessing the value of an asset before applying for an asset-based loan. Should the asset’s value be overestimated, the borrower may not be able to receive the loan amount they require. However, on the other hand, if the asset’s value is underestimated, the lender may not be comfortable providing the loan amount.
What is asset-based lending?
In conclusion, although it may sound like an unusual type of loan, an asset-based loan is probably the most common type of loan there is because lenders have a low-risk investment when the borrower has the asset to back it. As a result, businesses and individuals can leverage their assets to access the capital they need to meet their financial goals through asset-based lending.