A loan that is secured by an asset
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
Asset-based lending refers to a loan that is secured by an asset. In other words, in asset-based lending, the loan granted by the lender is collateralized with an asset (or assets) of the borrower.
Summary
- Asset-based lending refers to a loan that is secured by an asset.
- Examples of assets that can be used to secure a loan include accounts receivable, inventory, marketable securities, and property, plant, and equipment (PP&E).
- Lenders commonly use the loan-to-value ratio to determine the amount of money they are willing to lend.
Understanding Asset-based Lending
In asset-based lending, the loan is secured by the assets of the borrower. Examples of assets that can be used to secure a loan include accounts receivable, inventory, marketable securities, and property, plant and equipment (PP&E).
As the loan is secured by an asset, asset-based lending is considered less risky compared to unsecured lending (a loan that is not backed by an asset or assets) and, therefore, results in a lower interest rate charged. In addition, the more liquid the asset, the less risky the loan is considered and the lower the interest rate demanded.
For example, an asset-based loan secured by accounts receivable would be deemed safer than an asset-based loan secured by a property – the property is illiquid, and the creditor might find it difficult to liquidate the asset on the market quickly.
Asset-based Lending Amount
Asset-based lending commonly references the loan-to-value ratio. For example, a lender may state “the loan-to-value ratio for this asset-based loan is 80% of marketable securities.” It states that the lender would only be willing to provide a loan of up to 80% of the value of the marketable securities.
The loan-to-value ratio depends on the type of asset – lenders are generally willing to offer a higher loan-to-value ratio for more liquid assets. The loan-to-value ratio is calculated as follows:
Where:
- Loan Amount is the amount that the lender is willing to loan; and
- Asset Value is the value of the asset being used as collateral for the loan.
Generally, the loan-to-value ratios for receivables and inventories are 70% and 50%, respectively.
Example of Asset-Based Lending
A lender offers the following loan-to-value ratios for certain assets:
A borrower requires a $100,000 loan and owns the following assets:
- Marketable securities valued at $105,000
- Accounts receivable valued at $120,000
- Machinery valued at $250,000
If the borrower is only able to use one asset to secure the loan, which asset should the borrower use to secure a loan of at least $100,000?
- Marketable securities = $105,000 x 85% = $89,250 maximum loan amount;
- Accounts receivable = $120,000 x 70% = $84,000 maximum loan amount; and
- Machinery = $250,000 x 40% = $100,000 maximum loan amount.
The borrower should use machinery to secure the maximum loan.
Advantages of Asset-based Lending
Asset-based lending offers the following advantages to the borrower:
- Asset-based loans are easier and quicker to obtain than unsecured loans and lines of credit;
- Such loans generally include fewer covenants; and
- Asset-based loans generally come with a lower interest rate compared to other funding options.
Asset-based lending provides the following advantages for the lender:
- Asset-based loans are less risky as it is collateralized with an asset (or assets); and
- If the borrower defaults on the loan, the lender can obtain the assets that were used to secure the loan and liquidate them to settle the amount outstanding.
CFI has a new course on Asset-based Lending and Alternative Finance, an elective course in CFI’s CBCA® Program that compares types of alternative lending structures, including Asset-based lending (ABL) lines. Also, see all our commercial lending resources.
FAQs
Asset-based lending is the business of loaning money in an agreement that is secured by collateral. An asset-based loan or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower. The asset-based lending industry serves business, not consumers.
What are the problems with asset-based lending? ›
When assets are used as collateral, you face the risk that the value of those assets will fall, leaving you upside-down with more debt than equity. Borrowing limits. Not all of your assets may qualify as collateral, and the amount you can borrow may be further limited by how your lender values your eligible collateral.
What are examples of assets loans? ›
Asset-based lending refers to a loan that is secured by an asset. Examples of assets that can be used to secure a loan include accounts receivable, inventory, marketable securities, and property, plant, and equipment (PP&E).
What is the interest rate for asset-based lending? ›
In general, asset-based loan rates range from 5.25% to 15%.
How to get into asset-based lending? ›
To qualify for an asset-based loan, you'll need to put up high-value collateral — ideally an asset with a low depreciation rate that can be quickly converted to cash. It's also helpful to have a good credit and financial history.
What are the pros and cons of asset-backed lending? ›
Asset-Based Lending offers several advantages over traditional forms of financing, including lower interest rates, flexible repayment terms, and faster approval times. However, there are also some risks associated with this type of lending, such as higher fees and potential loss if you default on your loan.
Why do rich people borrow against assets? ›
Step 2: Borrow Against Assets
The family does NOT owe taxes on its asset-leveraged loans because the government doesn't tax borrowed money. Wealthy family uses its untaxed wealth to access significant amounts of untaxed cash to live luxuriously while continuing to grow its wealth, untaxed, indefinitely.
What are the risks of asset based financing? ›
Risk of losing valuable assets
In the event the business fails to repay the loan, the lender can seize the asset that was pledged as collateral to secure the loan or line of credit. The collateral may be sold by the lender to recover the money that was issued to the borrower.
What is a major drawback of asset-based valuation? ›
That said, asset-based valuation is not without its drawbacks. Unlike other methods, such as the income approach, the asset-based method disregards a company's prospective earnings.
Is a house considered an asset? ›
An asset is anything you own that adds financial value, as opposed to a liability, which is money you owe. Examples of personal assets include: Your home. Other property, such as a rental house or commercial property.
Borrowing against assets can offer potential benefits including a minimal or streamlined application process and the potential for favorable interest rates.
How to borrow against assets to avoid capital gains? ›
How does borrowing against assets help avoid capital gains tax? Borrowing against assets helps avoid capital gains tax because, by receiving loan proceeds without selling the assets, you're not realizing any capital gains. This strategy is often used through options like HELOC or SBLOC.
What is the difference between asset-based lending and collateral? ›
Asset-based lines require much less collateral than a bank will ask for. Asset-based lending advance percentages are much higher than the bank offers, meaning you do not have to put up as much collateral to obtain the same amount of money.
How big is the asset-based lending market? ›
Asset-based Lending Market was valued at USD 661.7 million in 2023 and is expected to grow at a CAGR of over 10% between 2024 & 2032. The market for asset-based lending (ABL) is growing due to economic expansion and recovery.
Can you get a mortgage based on assets? ›
The short answer is yes; you can use your assets instead of personal income to qualify for a home loan. However, additional documentation may be required to verify your qualifying assets.
What is the difference between asset finance and asset-based lending? ›
Asset financing lets a business borrow money to purchase assets, while asset-based lending is when a company borrows money and uses what it already owns to guarantee payment. Both facilities help businesses expand and grow in operations, allowing them to increase their production capabilities.
What is the difference between asset-backed loans and mortgages? ›
First, unlike mortgage-backed securities, which mortgages can only collateralize, asset-backed guarantees can be backed by a range of assets. Second, borrowers often sell mortgage-backed securities to investors, whereas lenders typically sell asset-backed securities to investors.
How does an asset-based mortgage work? ›
With this type of lending, you will be borrowing against your assets. The amount you are granted for your loan, known as the borrowing base, will be established based on a percentage of the assets' value.
