Asset-based lending is any kind of lending secured by anasset. This means, if theloan is not repaid, the asset is taken. In this sense, amortgage is an example of an asset-based loan. More commonly however, the phrase is used to describe lending to business and largecorporations using assets not normally used in other loans. Typically, the different types of asset-based loans includeaccounts receivable financing,inventory financing,equipment financing, orreal 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 ascollateral for loans (through the creation of enforceablesecurity interests).
Asset-based lending is usually done when the normal routes of raising funds is not possible, such as thecapital 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 lowerinterest 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 nationalinvestment banks (e.g.Citi,J.P. Morgan,Wells Fargo,Goldman Sachs,Morgan Stanley, et al.) andregional banks, offer these services to corporate clients.
Asset-based lenders are known for taking outtombstone ads in much the same way asinvestment banks.[3]
An example of asset-based loan usage was when the globalsecuritization market shrank to an all-time low after the collapse of investment bankLehman Brothers Holdings Inc in 2008.[4] Within Europe in 2008, over 710 billion euros worth of bonds were issued, backed largely by asset-based loans, such as home and auto loans.
Asset-based lending, once considered a last-resort finance option, has become a popular choice for companies and individuals that do not have the credit ratings, track record, or patience to pursue more traditional capital sources.
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 revolvingcredit 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 of receivables is a subset of asset-based lending (which uses inventory or other assets ascollateral). The lender mitigates its risk by controlling with whom the company does business to make sure that the company's customers can actually pay.[6]
Lines of credit may require that the company deposit all of its funds into a "blocked" account. The lender then approves any withdrawals from that account by the company and controls when the company pays down the line of credit balance.[citation needed]
Still another subset of a collateralized loan is apledging of receivables and anassignment of receivables ascollateral for the debt. In these instances,receivables are transferred to the lender when they arepledged as collateral. When the receivables arepledged as collateral, orassigned with the condition that the lender hasrecourse in the event the receivables areuncollectible, the receivables continue to be reported as the borrower's asset on the borrower'sbalance sheet and only afootnote is required to indicate these receivables are used as collateral for debt. The debt is reported as a liability on the borrower's balance sheet and as an asset (specifically, a receivable) on the lender’s balance sheet.
In some situations, the lender can actuallyrepledge or sell the collateral the borrower used to secure the loan from the lender. In this instance, the borrower continues to recognize the receivables as an asset on its balance sheet, and the lender only records the liability associated with the obligation to return the asset.[6]
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