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What Is Asset-Based Lending?

Asset-Based Lending: What Is It?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated September 19, 2023
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Asset-based lending is a specialized loan product that can provide borrowers with financing for commercial or personal purposes. Borrowers with corporate assets can use inventory and company equipment as collateral to secure asset-based financing.Borrowers with personal assets, such as fine jewelry or a single-family home, can pledge those assets as collateral to get asset-based financing. Below we explain how asset-based lending works and highlight some of the cons associated with ABL loans.

Asset-Based Lending Definition

The definition of asset-based lending is a secured loan or line of credit given to a borrower who pledges an asset as collateral. Commercial borrowers with cash flow shortfalls can pledge inventory, accounts receivable, and other company assets as collateral to secure asset-based lending.Consumers who own assets can pledge their personal property as collateral to secure asset-based lending, also known as ABL. Banks, credit unions, and private lenders may offer ABL financial products to consumers and commercial borrowers.

How Asset-Based Lending Works

How asset-based lending works is a borrower pledges an asset as collateral to secure a collateralized loan or line of credit. ABL lenders must generally verify the existence of your collateral and appraise its value to determine your borrowing base and loan amount.As mentioned earlier, commercial borrowers with cash flow shortfalls can pledge inventory, accounts receivable, and other company assets as collateral to secure asset-based lending. Borrowers who pledge accounts receivable as collateral may receive an ABL advance equal to 70% to 90% of the eligible collateral’s value.A consumer with valuable assets, such as a single-family home or fine jewelry, can pledge those assets as collateral to secure ABL loans or lines of credit. Borrowers are expected to repay ABL loans and could lose their collateral if they default on the loan. An ABL lender may seize and liquidate your collateral if you fail to make required payments on the loan.Unsecured personal loans are an alternative to ABL loans. Lenders may offer personal loans ranging from $1,000 to $100,000. Your credit score and debt-to-income ratio may impact how much of a personal loan you can get from a lender.Defined as a consumer lending product, the personal loans definition is generally a lump sum of money that borrowers must repay over a set period. Banks, credit unions, and private lenders may offer personal loans to borrowers with bad credit or no credit.Here are some of the personal loan benefits borrowers can experience:
  • Borrowers can get an unsecured personal loan with no collateral
  • Expecting mothers can use personal loans as a maternity leave loan
  • Borrowers may have few restrictions on how to use a personal loan  
Among the personal loan cons and pros are that they can help you build credit but may feature high rates of interest.Personal loans provide borrowers with a lump sum of money that must be repaid over a set period. Failing to pay and defaulting on a personal loan can have a major impact on your credit score.

Key Elements of Asset-Based Lending

Asset-based lending involves pledging an asset as collateral in order to secure funding. Key elements of asset-based lending include types of collateral you’re able to use, the relationship between the lender and the borrower, and the structure and terms of the loan.

Collateral in Asset-Based Lending

Types of assets that can be used in asset-based lending include real estate, such as your primary home or a vacation home, vehicles, fine jewelry, artwork, investments such as savings accounts, money market accounts, stocks, and bonds, and more.The value of the collateral you put up is assessed and appraised by the lender. This is what determines your risk and whether or not the lender decides to loan you money. Recommended: Guide to Collateralized Personal Loans

Asset-Based Lenders and Borrowers

Asset-based borrowers typically put up liquid collateral as a form of securing the loan and lessening the risk to the lender. Ultimately, the relationship between the borrower and lender is up to the lender, as they are the ones taking on all of the risk. 

Loan Structuring and Terms in Asset-Based Lending

Asset-based lending is typically structured as a loan or line of credit. A loan gives the borrower a lump sum of money that is repaid over a set period of time, including interest. A line of credit, on the other hand, gives the borrower access to funds up to a maximum credit limit. The borrower can use the funds, pay them back with interest, and use them again. Lines of credit do typically come with a loan term, as well, due to the fact that the asset may decrease in value. Capping the line at five years, for example, reduces the risk that the asset will decline in value and the borrower will not be able to repay the loan.If the borrower were to default on an asset-based lending loan or line of credit, the lender would be able to seize the collateral that was put up by the borrower. 

Example of Asset-Based Lending

A hard money personal loan is an example of asset-based lending. Borrowers can pledge real estate as collateral to secure hard money loans for buying residential or commercial property.Some ABL lenders may engage in predatory lending against homeowners. Predatory lenders, for example, may encourage you to borrow against the available equity in your home, and these same lenders may foreclose on your home if you default on the loan.Pawnbrokers may engage in asset-based lending by accepting fine jewelry, precious metal, or luxury watches as collateral for a personal loan.Certain personal loan tips can help you find the best financing terms for you, such as shopping around and comparing interest rates across lenders.

Benefits and Considerations of Asset-Based Lending

The biggest benefit of asset-based lending is the loan may come with better interest rates and faster funding times than traditional loans. Because the loan is backed by collateral, lenders take on less risk. This allows the lender to offer competitive rates on their products in addition to faster funding times, as qualifications may not be as stringent.Before deciding to move forward with asset-based lending, make sure you will be able to repay the loan. The biggest consideration is using your asset as collateral, because if you fail to repay the loan, the lender has the right to seize and liquidate your asset.

Asset-Based Lending Pros

Pros associated with asset-based lending include:

Lower Interest Rates

Any loan that is backed by collateral is going to come with lower interest rates, assuming all other qualifications are the same. This is because the lender takes on much less risk than if you were not able to put up collateral. If you default on your loan with no collateral, the lender is at a loss; whereas if you have collateral, the lender has the right to your asset.

Less Stringent Restrictions

Again, because the loan is backed by collateral, the lender may not be as concerned with your credit score or income. If you do have a good credit score or solid income, though, you most likely will be able to secure some of the best rates offered by the lender.

Flexible Repayment Schedules and Terms

Asset-based loans come in two forms — traditional loans that come with fixed interest rates and are repaid in monthly installments, and lines of credit. A line of credit offers more flexibility because you get to choose when you use the funds. Once you use them, you pay them back, and are able to use them again if needed until the term expires.

Asset-Based Lending Cons

Below, we highlight some of the cons associated with asset-based lending:

Last Resort Loan

Borrowers experiencing financial difficulties or cash flow shortfalls may rely on ABL financing as a last-resort loan. Borrowers in sound financial condition may also secure ABL loans, but some businesses may view asset-based lending as a sign of corporate weakness.

High Price

ABL loans can carry high fees and interest rates compared with more traditional financing options. The terms and conditions of asset-based lending can translate into a high price for borrowers.

High Maintenance

ABL lenders may impose tight debt covenants as a condition of financing because of the risks and high maintenance costs associated with asset-based lending. Borrowers may have to accept strong controls and close monitoring as a condition of getting an ABL loan or line of credit.

How Can You Benefit From Asset-Based Lending?

ABL loans can provide borrowers with critical financing during a financial crisis. Asset-based lending may satisfy the liquidity needs of commercial borrowers as they anticipate future collection of IOU accounts receivable from clients or customers.Asset-based lending can give borrowers quick financing to buy commercial or residential property. ABL loans may also give borrowers funding to help cover any emergency or unplanned expenses. Borrowers with valuable assets can borrow against the value of their assets without liquidating those assets.An ABL loan may provide you with funding equal to 50% to 90% of your collateral’s value, depending upon the nature and quality of the assets.Recommended: Guide To Using Debt to Make Money

Asset-Based Lending vs. Traditional Financing

The main difference between asset-based lending and traditional financing is asset-based lending requires collateral in order to secure the loan. Traditional financing, including small business loans and personal loans, looks at you or your business’s credit score, income, debt-to-income ratio, and credit history. To qualify for traditional financing, lenders usually want to see good credit scores, a business history of at least six months, a low debt-to-income ratio, a positive cash flow, and a solid credit history. Because traditional forms of financing typically are not backed by collateral, the lender is not willing to risk lending money to those who do not meet their qualifications.

Asset-Based Lending Alternatives

Here are some alternatives to asset-based lending:

Credit Card

Credit cards are an alternative to ABL loans. Every credit card account has a predetermined credit limit capping how much you can charge on the card.Cardholders are expected to repay their credit card debts over time and can make monthly payments that meet or exceed the minimum payment due. You can generally avoid paying interest on credit card purchases by paying your statement balance in full each billing cycle.

Cash

Using cash savings can serve as an alternative to borrowing funds from an ABL lender. You may not need to pledge assets as collateral for financing if you have enough cash on hand to meet your needs.Bankrolling your personal or commercial expenses can deplete your savings, but the upside to using cash is it completes a transaction without relying on a creditor.

Unsecured Personal Loan

An unsecured personal loan can serve as an alternative to ABL loans. Borrowers may take out personal loans to help cover planned or unplanned expenses.Personal loans can provide borrowers with a lump sum of money and payment schedule for repaying the loan. Unsecured personal loans can give you quick cash without having to pledge your assets as collateral.Recommended: Interest Rates for Personal Loans, Explained

The Takeaway

Asset-based lending can provide borrowers with critical financing, but borrowing funds based upon the value of your assets can be risky. An ABL lender may seize and sell your collateral if you fail to repay the loan in full.Lantern by SoFi can help you check the interest rates of personal loans. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice. Check your rate today and see if you prequalify.

Frequently Asked Questions

What role do appraisals play in asset-based lending?
How does asset-based lending support working capital needs?
Can borrowers negotiate the terms and conditions of asset-based loans?
Are there specific asset-based lending options for startups or small businesses?
Photo credit: iStock/Ridofranz
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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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