Asset-based lending refers to loans secured by a wide variety of assets. Factoring is a type of asset based lending. Businesses can borrow money using the liquid, current assets of the company (such as accounts receivable and/or inventory) or the fixed assets of a business (such as plant, property, and equipment) as collateral. Asset-based lenders rely on the value of the underlying collateral to minimize the loan’s credit risk. Asset-based lenders are sometimes referred to as Secured Lenders.
The primary difference between asset-based lending and traditional lending is what the lender looks to when underwriting a loan. A traditional lender will look first to the cash flow then to collateral. An asset-based lender looks to collateral first. Since traditional lenders underwrite cash flow as their primary repayment source, they typically require less collateral controls and monitoring but more financial covenants.
For asset rich companies, an asset-based loan may make more funds available because it is not based strictly on the anticipated levels of cash flow. Additionally, the structure often requires fewer covenants, providing more flexibility for many borrowers.