We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is Asset-Based Lending?

Gerelyn Terzo
By
Updated: May 17, 2024
Views: 5,505
Share

Asset-based lending, also known as asset-backed lending or asset-based finance, is the practice of issuing a loan to a company for an agreed-upon amount that is backed by a certain asset, known as collateral. The size of the loan is based on the value of the assets being used as collateral. In the event that the borrower is unable to repay a loan with interest, the lender obtains ownership rights to the asset. Interest rates tied to an asset-based loan tend to be higher than for more traditional loans. In some cases, asset-based loans may be accessed as a last resort by a company that is unable to obtain more traditional financing.

Various types of assets are may be used as collateral in a loan structure. For instance, a company may use its accounts receivables, business inventory, or real estate to secure a loan. Proceeds from the loan might cover operational expenses or fund a financial restructuring or a merger. The borrower retains the rights of ownership to its assets unless it fails to make promised payments.

Loans tied to asset-based lending may be distributed in different forms. A bank may choose to extend a line of credit to a borrower, which means that a company can draw on funds up to a certain amount as needed. The benefit to a line of credit is that the interest payments are typically only charged for the funds accessed from the revolving loan, which means the borrower only pays interest on what it uses.

Asset-based lending is a common source of funding for companies with compromised credit or too much debt already on a balance sheet that prevents them from obtaining cheaper loans from a financial institution. It is also common among start-up companies with little financial history in need of steady cash flow. Asset-based lending might be chosen over equity finance because the latter requires that a company cede some of its ownership over to shareholders.

Hedge funds use asset-backed lending as a common trading strategy. An asset-based lending hedge strategy, for instance, might involve a company that is pursuing a particular project, such as an oil and gas drilling endeavor. If the company is unable to obtain financing from an investment bank, it might turn to a large hedge fund for capital using the project as collateral. In the event the company becomes unable to repay the loans, the hedge fund takes ownership of the said project. The new owners can continue to operate the project or attempt to sell it to another company for a profit.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Gerelyn Terzo
By Gerelyn Terzo
Gerelyn Terzo, a journalist with over 20 years of experience, brings her expertise to her writing. With a background in Mass Communication/Media Studies, she crafts compelling content for multiple publications, showcasing her deep understanding of various industries and her ability to effectively communicate complex topics to target audiences.

Editors' Picks

Discussion Comments
Gerelyn Terzo
Gerelyn Terzo
Gerelyn Terzo, a journalist with over 20 years of experience, brings her expertise to her writing. With a background in...
Learn more
Share
https://www.wisegeek.net/what-is-asset-based-lending.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.