Asset-Based Lending Key Terms

Learn basic terms related to asset-based lending

A company might turn to an asset-based loan when all other avenues have been exhausted. Rather than getting a loan secured by a mortgage or bond, the company would put up an asset as collateral. In this context, an asset can be anything from inventory to accounts receivable; in some cases, it may even refer to intellectual property such as the rights to a drug or software program. In the event the company fails to repay the loan, the lender owns the asset.

 

Factoring and accounts receivable financing

Accounts receivable financing is a type of asset-based lending, primarily for businesses that provide services to other businesses. It allows a company to open a revolving line of credit backed by its account receivables. Factoring is slightly different; in many cases, the lender will control collections to make sure it gets paid.
Try: First Capital offers factoring as one of its financial products, and gives a nice rundown of what factoring is and what types of businesses may qualify. 1st Commercial Credit calls its service accounts receivable financing.

Working capital

Companies often secure asset-based loans to get working capital, such as the money needed to continue paying vendors and employees. If the company turns to factoring or asset-based lending, it's probably because it has money tied up in inventory, or is not effectively collecting on debts.
Try: Investopedia offers a concise explanation of working capital.

Field examinations

An asset-based lender must verify the value of the collateral a company puts up to secure an asset-based loan. This process involves forensic accounting to make sure the company's books are in order, as well as evaluating the worth of a company's inventory.
Try: Freed Maxick ABL Services offers field examination services for asset-based lenders that do not have an examination team in-house. Its website has a comprehensive overview of the services it provides.

Credit risk analysis

Asset-based lending is riskier than traditional mortgage-backed lending; companies usually seek asset-backed loans when they do not have a long operating history, or just have bad credit. Credit risk analysis is the process of determining the quality and liquidity of a company's collateral.
Try: Goliath, a resource for business information, carries an article on risk management as it relates to asset-based lending.

Tangible asset

A tangible asset is physical property, such as real estate or equipment, owned by a company; inventory, intended for customers, does not count. When accessing a company's worth, an asset-based lender will usually evaluate its tangible assets.
Try: US Business Finance explains what type of collateral is acceptable to secure an asset-based loan.

Intangible asset

Though it can be difficult to assign value to intangible assets, they are often worth a lot. An intangible asset can refer to intellectual property, including patents, copyrights or brands. Tangible assets have traditionally been used to secure asset-based loans, but intangible assets are emerging as acceptable collateral.
Try: AllBusiness.com has an article on intangible assets and asset-backed lending.

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