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EspañolASSET-BASED LENDING
In the simplest meaning, 'asset-based lending' is any kind of lending secured by an asset. This means, if the loan is not repayed, 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 corporations using assets not normally used in other loans. These can include exotic things like lending against the value of a trademark or whole assets of intellectual property. For example, Midway Games took out a line of credit secured by its Mortal Kombat franchise; if it fails to repay, the bank then owns the Mortal Kombat franchise and can sell the rights to it.
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 is in dire financial status. Thus, asset based lending can be compared to subprime lending. It is usually accompanied by high interest rates, and can be very lucrative for the parent company. For example, the bank Wells Fargo made more money from asset-based lending business then it did the rest of its corporate business (both lending and fee based services).
In fact, many financial services CEOs argue that normal lending to corporations can no longer be profitable in and of itself, because the interest rates involved are too low. This is because for most of the second half of the twentieth century, it has been possible for corporations to not borrow from banks but instead borrow from individual investors in the form of bonds. Thus, competition has made rates so low that many feel they do not adequately reflect the risk (see: risk-based pricing). Most financial services companies now only lend as part of a package of services, or do asset based lending or other more lucrative businesses.
Asset-based lenders are known for taking out tombstone ads in much the same way as investment banks.
Main articles: Asset-based loan
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 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. Finally, an asset based line of credit charges an interest rate high enough and has other terms which generally allow the lender to profitably collect the money owed to the company should the company default on payments to the lender. The most extreme form of an asset based line of credit is known as factoring, where the company sells off its receivables so that now its customers owe the lender. 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.
★ Asset-backed security
★ Asset-based loan
★ Asset-Based Lender: BFI Business Finance
★ ABF Journal Magazine
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 is in dire financial status. Thus, asset based lending can be compared to subprime lending. It is usually accompanied by high interest rates, and can be very lucrative for the parent company. For example, the bank Wells Fargo made more money from asset-based lending business then it did the rest of its corporate business (both lending and fee based services).
In fact, many financial services CEOs argue that normal lending to corporations can no longer be profitable in and of itself, because the interest rates involved are too low. This is because for most of the second half of the twentieth century, it has been possible for corporations to not borrow from banks but instead borrow from individual investors in the form of bonds. Thus, competition has made rates so low that many feel they do not adequately reflect the risk (see: risk-based pricing). Most financial services companies now only lend as part of a package of services, or do asset based lending or other more lucrative businesses.
Asset-based lenders are known for taking out tombstone ads in much the same way as investment banks.
| Contents |
| Features of asset-based loans |
| See also |
| External links |
Features of asset-based loans
Main articles: Asset-based loan
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 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. Finally, an asset based line of credit charges an interest rate high enough and has other terms which generally allow the lender to profitably collect the money owed to the company should the company default on payments to the lender. The most extreme form of an asset based line of credit is known as factoring, where the company sells off its receivables so that now its customers owe the lender. 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.
See also
★ Asset-backed security
★ Asset-based loan
External links
★ Asset-Based Lender: BFI Business Finance
★ ABF Journal Magazine
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