Definition: Asset-based lending is a new kind of financing that uses borrowers’ financial assets instead of traditional collateral like homes or cars.
Asset-based lending gives business owners the capital they need to expand, expand, and expand their businesses and the option to pay off their loans faster through higher rates of return on investments. This allows business owners to capitalize on opportunities that may not otherwise come along for people with less capital available for investment. Business owners can also use asset-based lending as a complementary form of funding rather than a stand-alone funding source for more general purposes.
The terms and conditions of an asset-based loan (also called a security loan or securitization loan) are set by the lender. They are designed to protect the lender, borrower, or the third party against loss in the property involved in the loan goes into default. Lenders use various tools and methods to determine what constitutes a loss. Some lenders require collateral and require partial or complete payment before allowing a borrower to proceed with a loan. Other lenders may require both collateral and full payment upfront before allowing a borrower to proceed.
Asset-backed loans typically have lower interest rates than other types of loans because the lender has an interest in your assets and therefore has incentives to ensure they are well-managed.
Asset-based lending is a targeted, systematic alternative financing for small and medium-sized enterprises (SMEs). Under this strategy, SMEs can borrow against their overall property or equipment value with some limits and requirements designed to reward risk-taking and encourage long-term property maintenance.
Asset-based lending is used by corporations such as banks and financial institutions to encourage managers to retain business assets to manage them and increase their value continuously. Banks use asset-based lending techniques to increase profitability and return on investment by attracting customers tapping into assets through reducing or eliminate interest rates and fees charged against assets.