subject: 3 Questions To Ask Before Getting An Asset Backed Loan [print this page] Asset lending, also called asset-based lending, in it's simplest meaning is the lending of money that is secured by an asset. This means, if the loan is not repaid, the asset is sold. In this sense, a mortgage is an example of an asset-backed loan.
More commonly, the phrase is used to describe lending to business and large corporations using assets not normally used in other loans. For example, these loans may be tied to inventory, accounts receivable, machinery or equipment.
This type of loan can be provided by boutique lenders, large investment banks, conglomerates or even regional banks.
In this article we explain more of the facts around asset lending and asset loans for businesses.
How Does An Asset Loan Work?
Typically, an asset-based loan will create a business line of credit that works similarly to the way that short-term finance or a bridging loan may work. That is, to cover short-term cash-flow problems. The line of credit may either have a set limit, or a "revolving line of credit" that is based on the accounts receivables that are still outstanding for that particular business. If the business has a revolving line of credit, the lender would continually monitor and audit the company to ensure the line of credit is in line with the accounts receivable.
When is An Asset Based Loan Used?
Asset Lending is typically used for businesses that have short-term cash-flow problems but is also commonly used for commercial real estate financing. Asset based lending is used with all size companies and can allow an asset rich corporation to receive financing when they are experiencing a need for growth or have not met standard liquidity or credit requirements.
What Is The Difference Between An Asset Based Loan and Bridging Finance?
As described above, an asset-based loan can often be secured by assets, including a businesses' accounts receivable, inventory, machinery or equipment. An asset-based loan may be agreed for over a short, medium or long-term time frame and may or may not include higher interest rates than other loans.
Bridging finance may also be backed by an asset, such as other real estate or equipment. However, in contrast to an asset-based loan, bridging finance is only meant to be a short-term loan and is based on a set line of credit (as opposed of a revolving line of credit). Typically bridging finance will cover a short-term period until the cash flow has improved or an alternative medium to long-term loan has been established.
