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.[1] 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).
Usage
Asset-based lending is usually done when the normal routes of raising funds is not possible, such as the capital markets (selling bonds to investors) and normal unsecured or mortgage secured bank. This is often because the company has exhausted other capital raising options or needs more immediate capital for project financing needs (such as inventory purchases, mergers, acquisitions, and debt purchasing). Asset-based loans are also usually accompanied by lower interest rates, as in the event of a default the lender can recoup its investment by seizing and liquidating the assets tied to the loan.[2]
Many financial services companies now use asset-based lending package of structured and leveraged financial services. Many banks, both national investment banks (e.g. Citi, J.P. Morgan, Wells Fargo, Goldman Sachs, Morgan Stanley, et al.) and regional banks, offer these services to corporate clients.
Asset-based lenders are known for taking out tombstone ads
Features of asset-based loans
Asset-based loans
An asset-based business line of credit is usually designed for the same purpose as a normal business line of credit: to allow the company to bridge itself between the timing of cashflows of payments it receives and expenses. The primary timing issue involves what are known as accounts receivables—the delay between selling something to a customer and receiving payment for it.[5]
A non-asset-based line of credit will have a credit limit set on account opening by the accounts receivables size, to ensure that it is used for the correct purpose. An asset-based line of credit however, will generally have a revolving credit limit that fluctuates based on the actual accounts-receivable balances that the company has on an ongoing basis. This requires the lender to monitor and audit the company to evaluate the accounts receivable size, but also allows for larger limit lines of credits and can allow companies to borrow that which it normally would not be able. Generally, terms stipulating seizure of collateral in the event of default allow the lender to profitably collect the money owed to the company should the company default on its obligations.[2]
Factoring receivables
See also
- Asset-backed security
- Revolving credit
- Debt-trap diplomacy
External links
References
- Asset-Based Lending investopedia.com, retrieved 29 May 2020^
- John Caouette, Edward Altman, Paul Narauanan, Robert Nimmo. Managing Credit Risk: The Great Challenge for the Global Financial Markets John Wiley & Sons, Inc., retrieved 29 July 2014^
- Charles R. Geisst. Encyclopedia of American business history