Asset based lending is simply the taking out of a loan where the collateral is an asset and can be foreclosed or taken possession of by the lender if the borrower defaults on his or her payments. Although a mortgage is an example of asset based lending companies also take help of such loans as a last resort when all other traditional sources are exhausted. This is because such loans have a very high interest rate compared to conventional loans.

• The assets that can be used as collateral in these types of loans can vary and can include inventory, machinery, or any physical real estate that a company possesses. Loans tied to asset-based lending might be dispersed in various forms. A bank might decide to extend a line of credit to a borrower, which means that a business entity can draw on resources up to a definite amount as required. The advantage of a line of credit is that the interest payments are normally only charged for the funds used from the revolving loan, which means the borrower only shells out interest on what it utilizes.
• Asset-based lending is a widespread resource of funding for companies with bad credit or too much liability by now on a balance sheet that stops them from acquiring cheaper loans from a financial establishment. It is also common amongst start-up companies with modest financial history in requirement of stable cash flow. Asset-based lending may be preferred over equity finance since the latter necessitates that a company relinquish some of its rights over to shareholders.
• An asset based business line of credit is generally intended for the same reason as a standard business line of credit – to permit the company to bridge itself between the timing of cash flows of payments it takes delivery of and the operating expense of the company. The principal timing issue engages what are known as accounts receivables which are the interruption between selling something to a consumer and being paid for it. A non asset based line of credit will have a credit limit situated on account opening by the accounts receivables volume, to make certain that it is used for the approved reason.
• In many ways asset based pricing can be compared to sub-prime lending since this is deemed as the lending of last resort. The high interest rate charged is usually because the company is in dire need of finances and has exhausted other sources such as the capital and the bond market. These other sources are unwilling to take such a risk and are regulated by government rules and regulations unlike asset-backed lenders who are almost free of any restrictions. Therefore such type of lending is usually not recommended and can carry heavy interest or can lead to an inevitable foreclosure.

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