Asset-Based Lending

Asset-based lending focuses on the value of a company’s assets rather than its creditworthiness.


What Is an Asset-Based Lending?

In asset-based lending, lenders have a vested interest in the value of a company’s assets rather than just its creditworthiness. These lenders focus on the value of the entity’s assets when determining loan eligibility. In general, asset-based lending is the act of using an organization’s assets as a way to get financing. 
Let’s take an example of an asset-based loan on an individual level. When you apply for an asset-based loan, your assets are what drive your approval instead of your credit score or personal history. The lender will likely look at your personal assets, like the value of your home, its location and any other property you own that can be used as collateral. 

How Does Asset-Based Lending Differ From Traditional Lending?

Traditional lending is a type of financing that is primarily based on the borrower’s ability to repay the debt through a predetermined schedule of payments. Credit scores, collateral and cash flow are the commonly-used metrics to determine a borrower’s ability to repay a debt-based loan. 

Asset-based lending, on the other hand, is a type of financing that is primarily based on the value of a borrower’s assets as collateral. While both debt-based and asset-based lending can be applied to a wide range of industries, asset-based typically applies to small businesses and individuals. On the other hand, debt-based is more commonly used by large corporations.

What Are the Benefits of Asset-Based Lending?

No Credit Checks: There is no need to waste time and effort trying to clean up your credit score before applying for a loan. Instead, lenders will focus solely on what you can offer in terms of collateral. 

Quicker Approval Times: Because asset-based lenders are primarily focused on the value of your assets, the approval process will likely be much quicker than it would be if you were applying for a debt-based loan. This is especially true for business owners who have valuable assets to offer as collateral. 

Reduced Interest Rates: Because asset-based lenders are primarily focused on the value of your assets, they may be willing to charge a lower interest rate on your loan. And since interest rates are often a large part of the total cost of a loan, this could end up saving you a significant amount of money in the long run. 

Better Options for Bad Credit: If you have a low credit score or have been turned down by traditional lenders, you may have a better chance of being approved for an asset-based loan. This is because asset-based lenders are primarily focused on the value of your assets, so your credit score won’t have as much of an impact on your approval.

Drawbacks of Asset-Based Lending

Asset Inspection: Unlike debt-based lenders, who are focused primarily on your ability to repay the loan, asset-based lenders want to make sure that the collateral you are offering is worth the loan. This often involves an on-site inspection of your equipment or property, which can be both time-consuming and costly. 

Risky Borrowers: While asset-based lending is a good option for borrowers with low credit scores or those who have been turned down by traditional lenders, it also attracts risky borrowers who have no intention of paying back the loan. Because asset-based lenders are primarily focused on the value of your assets, they are often willing to take a much higher risk than debt-based lenders. It means that such lenders may have strict rules in case of default. 

What Is Considered an Asset for an Asset-Based Loan?

It is important to note that not all assets are considered equal. While some assets will likely be more valuable than others for the purposes of an asset-based loan, the value of each asset will vary from one lender to another. However, there are a few types of assets that are commonly used for collateral in an asset-based loan. 

Real Estate: The most common form of collateral for an asset-based loan is real estate. Lenders often use your property as collateral while offering you the loan. 
Marketable Securities: Marketable securities are assets, such as stocks, bonds and mutual funds, that have a publicly traded price. Lenders may take a percentage of the value of these assets. 
Equipment: Equipment, such as computers, vehicles and machinery, can also be used as collateral for an asset-based loan. As with real estate, lenders will often take a percentage of the value of these assets.