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Asset-Based Lending: Definition & Uses

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  • 0:02 Asset-Based Lending
  • 0:26 Definition
  • 1:38 Uses of Asset-Based Lending
  • 2:14 Business Requirements Profile
  • 3:09 Lesson Summary
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Lesson Transcript
Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

In this lesson, we will see how asset-based lending provides financing options for companies that have assets but are faced with short-term cash flow problems. After watching the video, check out the quiz questions for more practice on the use of asset-based lending.

Asset-Based Lending

Mark owns a small business which buys, maintains, and rents out residential real estate. Although he got his start in the business with methods such as government-backed mortgages and even using his personal credit cards, he's now exploring other financing possibilities as his business grows. Let's take a look at what asset-based lending is and how Mark might qualify and use this option to meet his financing needs.

Definition

Asset-based lending describes a loan made to a business that is secured by collateral, also known as assets. When Mark used a credit card to fund his business in the early days he was using unsecured debt, which meant that the credit card company wouldn't have the ability to seize assets bought with the card if he defaulted on the loan. Other possible options for financing include mortgages, business credit cards, or selling securities such as bonds and stock shares. Now that he has equity in some of his paid for properties, he can get business financing through asset-based lending using the homes as collateral to guarantee a loan. If he doesn't pay this loan as agreed, the lender can seize or retake the property.

Assets don't have to be limited to real estate. Property such as machinery or merchandise in inventory can be used to secure the loan. Lenders will also accept accounts receivable, the income that hasn't been received yet but has been billed to a client.

The loan itself generally takes one of two forms. It can be a line of credit, which allows the borrower to borrow money and repay the money as needed, similarly to a credit card. Another possibility is to take out a term loan for a fixed amount with a set repayment schedule, much like a mortgage or auto loan.

Uses of Asset-Based Lending

Why would a company put up with the risk of guaranteeing a loan with its assets? With a guaranteed source of funds that the lender could collect on in case of default, that lender is more likely to provide financing. A young company, such as Mark's, might have needs such as making payroll or buying additional tools and equipment to maintain the properties but be unable to meet these needs in the short term because of a lack of cash flow. A retail business might use the loan proceeds to purchase inventory and then use the profit from sales to pay back the loan. By borrowing money, the business can remain operational for a period of time even if the owner is unwilling or unable to put cash into the business.

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