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Asset-Based Lending: What Is It?

Asset-Based Lending: What Is It?
Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Updated June 7, 2022
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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 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.

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.

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.

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.

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.
Photo credit: iStock/Ridofranz
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.LCPL0322020

Frequently Asked Questions

What are the types of asset-based loans?
What is an example of a form of asset-based lending?
How do I get an asset-based loan?

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 currently serves 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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