Asset Base Loan

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.

  • 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.

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.

FAQ


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. … It is also known as asset-based financing.

Common types of assets include current, non-current, physical, intangible, operating, and non-operating. Correctly identifying and classifying the types of assets is critical to the survival of a company, specifically its solvency and associated risks.

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Understanding Working Capital

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.

Special Considerations

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.

Generally, the loan-to-value ratios for receivables and inventories are 70% and 50%, respectively.