In the simplest meaning, asset-based lending is any kind of
lending secured by an asset. This means, if the Loan is not repayed, the asset is taken. In this sense, a mortgage is an
example of an asset-backed loan. More commonly however, the
phrase is used to describe lending to business and large Corporation.
Corporations using assets not normally used in other loans. Typically,
these loans are tied to inventory, accounts receivable, machinery and
equipment, but they can also include exotic things like the value of
pharmacy script files, or whole assets of Intellectual property. For
example, XYZ Games took out a Line of Credit (finance) secured
by its Human Combat (series), if it fails to repay, the Bank then owns
the Human Combat franchise and can sell the rights to it. This type
of lending is usually done when the normal routes of raising funds,
such as the capital markets (selling bonds to investors) or normal
unsecured or mortgage secured bank lending is not possible. This is
usually because the company is in dire financial status. Thus, asset
based lending can be compared to "Subprime lending", It is usually
accompanied by higher Interest rates and can be very lucrative for
the parent company. For example, some large national banks make more
money from asset-based lending business then it did the rest of its
corporate business. In fact, many financial services argue that
normal lending to corporations can no longer be profitable in and
of itself, because the interest rates involved are too low. This is
because for most of the second half of the twentieth century,
it has been possible for corporations to not borrow from banks
but instead borrow from individual investors in the form of bonds.
Thus, competition has made rates so low that many feel they do
not adequately reflect the risk-based pricing. Most financial services
companies now only lend as part of a package of services, or do
asset based lending or other more lucrative businesses.
Features of asset-based loans or asset based business lines 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. 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 receivables balances that
the company has on an ongoing basis. This requires the lender
to monitor and audit the company to evaluate the accounts
receivables size, but also allows for larger limit lines of credits, and
can allow companies to borrow, that normally would not be able to.
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 to
the lender.
