Asset-based lending is a form of business lending in which a loan is offered by a Lender to a Borrower against the value of one or more assets that the Borrower puts up as collateral for the loan. This asset secures the loan in a Loan-to-Value (LTV) ratio.
For example, Vehicle and Equipment Financing is a form of Asset-based lending in which the Lender offers a loan to the Borrower usually against up to about 80% (even up to 100% for high creditworthy Borrowers who may have a long history with the Lender) with the vehicle or equipment as the collateral. If the Borrower fails to pay the outstanding loan, the Lender can legally take possession of the asset and sell it to recoup its loan.
The most common form of asset-based lending is home mortgages. The mortgage company, usually a bank, will loan money to a homebuyer against the value of the house that the buyer intends to purchase.
The terms and interest rates in an asset-based loan transaction depend on the type of asset in the transaction.
Highly-liquid assets like marketable securities, stocks, bonds, and mutual funds that are easy to convert to cash are generally offered lower interest rates and flexible repayment terms. Less liquid assets like real estate, vehicles, and equipment tend to have higher interest rates attached to their loans.