Asset-based lending
Encyclopedia
In the simplest meaning, asset-based lending is any kind of lending secured by an asset. This means, if the loan
is not repaid, the asset is taken. In this sense, a mortgage
is an example of an asset-backed loan. More commonly however, the phrase is used to describe lending to business and large corporation
s using assets not normally used in other loans. Typically, these loans are tied to inventory, accounts receivable, machinery and equipment.
This type of lending is usually done when the normal routes of raising funds, such as the capital markets (selling bonds to investors) or normal unsecured or mortgage secured bank lending is not possible. This is usually because the company was unable to raise capital in the normal marketplace or needs more immediate capital for project financing needs (such as inventory purchases, mergers, acquisitions and debt purchasing). It is usually accompanied by higher interest rate
s, and can be very lucrative for the parent company. For example, the bank Wells Fargo
made more money from asset-based lending business than it did the rest of its corporate business (both lending and fee based services).
Many financial services companies now use asset-based lending package of structured and leveraged financial services. Most banks, both national investment banks (Goldman Sachs, RBC) and conglomerates (i.e. Citigroup, Wells Fargo), along with regional banks, offer these services to corporate clients.
Asset-based lenders are known for taking out tombstone ads
in much the same way as investment banks.
Factoring
of receivables, is a subset of asset-based lending and is often used in conjunction with a standard ABL facility which uses inventory or other assets as collateral. The lender mitigates its risk by controlling who the company does business with to make sure that the company's customers can actually pay.
Lines of credits to even riskier companies may require that the company deposit all of its funds into a "blocked" account. The lender then approves any withdrawals from that account by the company and controls when the company pays down the line of credit balance.
Still another subset of a collateralized loan is a Pledging of Receivables and an Assignment of Receivables as Collateral
for the Debt. In many instances, Receivables
are transferred to the lender when they are Pledged as Collateral
. When the Receivables
are Pledged as Collateral
, or Assigned with the condition that the Lender "has Recourse" in the event the Receivables
are uncollectible, the Receivables
continue to be reported as the borrower's asset on the borrower's Balance Sheet and only a Footnote is required to indicate these Receivables
are used as Collateral
for debt. The debt is reported as a Liability on the borrower's Balance Sheet
and as an Asset (a Receivable) on the Lender’s Balance Sheet
. In some situations, the lender can actually Repledge or Sell the Collateral
the borrower used to secure the loan from the lender. In this instance, the borrower continues to recognize the Receivables
as an asset on the borrower's Balance Sheet
, and the lender only records the Liability associated with the obligation to return the asset.
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
is not repaid, the asset is taken. In this sense, a mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
is an example of an asset-backed loan. More commonly however, the phrase is used to describe lending to business and large corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
s using assets not normally used in other loans. Typically, these loans are tied to inventory, accounts receivable, machinery and equipment.
This type of lending is usually done when the normal routes of raising funds, such as the capital markets (selling bonds to investors) or normal unsecured or mortgage secured bank lending is not possible. This is usually because the company was unable to raise capital in the normal marketplace or needs more immediate capital for project financing needs (such as inventory purchases, mergers, acquisitions and debt purchasing). It is usually accompanied by higher interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s, and can be very lucrative for the parent company. For example, the bank Wells Fargo
Wells Fargo
Wells Fargo & Company is an American multinational diversified financial services company with operations around the world. Wells Fargo is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization. Wells Fargo is the second largest bank in deposits, home...
made more money from asset-based lending business than it did the rest of its corporate business (both lending and fee based services).
Many financial services companies now use asset-based lending package of structured and leveraged financial services. Most banks, both national investment banks (Goldman Sachs, RBC) and conglomerates (i.e. Citigroup, Wells Fargo), along with regional banks, offer these services to corporate clients.
Asset-based lenders are known for taking out tombstone ads
Tombstone (financial industry)
Tombstone are advertisements that are most often used in the financial industry, where a particular transaction, such as an offering or placement of stock of a company, is formally announced...
in much the same way as investment banks.
Features of asset-based loans
An asset based business line of credit is usually designed for the same purpose as a normal business line of credit - to allow the company to bridge itself between the timing of cashflows of payments it receives and expenses. The primary timing issue involves what are known as accounts receivables - the delay between selling something to a customer and receiving payment for it. A non asset based line of credit will have a credit limit set on account opening by the accounts receivables size, to ensure that it is used for the correct purpose. An asset based line of credit however, will generally have a revolving credit limit that fluctuates based on the actual accounts receivables balances that the company has on an ongoing basis. This requires the lender to monitor and audit the company to evaluate the accounts receivables size, but also allows for larger limit lines of credits, and can allow companies to borrow that normally would not be able to. Generally, terms stipulating seizure of collateral in the event of default allow the lender to profitably collect the money owed to the company should the company default on its obligations to the lender.Factoring
Factoring
Factoring can refer to the following:* A form of commercial finance - see factoring ; structured settlement factoring transaction* Factorization, a mathematical concept* Factoring a design, as in code refactoring...
of receivables, is a subset of asset-based lending and is often used in conjunction with a standard ABL facility which uses inventory or other assets as collateral. The lender mitigates its risk by controlling who the company does business with to make sure that the company's customers can actually pay.
Lines of credits to even riskier companies may require that the company deposit all of its funds into a "blocked" account. The lender then approves any withdrawals from that account by the company and controls when the company pays down the line of credit balance.
Still another subset of a collateralized loan is a Pledging of Receivables and an Assignment of Receivables as Collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
for the Debt. In many instances, Receivables
Receivables
Receivables may refer to the amount due from individuals and companies. Receivables are claims that are expected to be collected in cash. These are frequently classified as:...
are transferred to the lender when they are Pledged as Collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
. When the Receivables
Receivables
Receivables may refer to the amount due from individuals and companies. Receivables are claims that are expected to be collected in cash. These are frequently classified as:...
are Pledged as Collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
, or Assigned with the condition that the Lender "has Recourse" in the event the Receivables
Receivables
Receivables may refer to the amount due from individuals and companies. Receivables are claims that are expected to be collected in cash. These are frequently classified as:...
are uncollectible, the Receivables
Receivables
Receivables may refer to the amount due from individuals and companies. Receivables are claims that are expected to be collected in cash. These are frequently classified as:...
continue to be reported as the borrower's asset on the borrower's Balance Sheet and only a Footnote is required to indicate these Receivables
Receivables
Receivables may refer to the amount due from individuals and companies. Receivables are claims that are expected to be collected in cash. These are frequently classified as:...
are used as Collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
for debt. The debt is reported as a Liability on the borrower's Balance Sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
and as an Asset (a Receivable) on the Lender’s Balance Sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
. In some situations, the lender can actually Repledge or Sell the Collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
the borrower used to secure the loan from the lender. In this instance, the borrower continues to recognize the Receivables
Receivables
Receivables may refer to the amount due from individuals and companies. Receivables are claims that are expected to be collected in cash. These are frequently classified as:...
as an asset on the borrower's Balance Sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
, and the lender only records the Liability associated with the obligation to return the asset.