In the simplest meaning, asset based lending, refers to any kind of lending secured by an asset. This means, if the loan is not repayed, the asset is taken. In this sense, a mortgage is an example of an asset backed loan. More commonly however, the phrase is used to describe lending to business and large corporations using assets not normally used in other loans. These can include exotic things like lending against the value of a trademark or whole assets of intelectual property. For example, Midway games took out a line of credit secured by its Mortal Kombat franchise; if it fails to repay, the bank then owns the Mortal Kombat franchise and can sell the rights to it.
This type of lending is usually done when the normal routes of raising funds, such as the capital markets (selling bonds to investors) or normal unsecured or mortgage secured bank lending is not possible. This is usually because the company is in dire finanical status. Thus, asset based lending can be compared to sub-prime lending. It is usually acompanied by high interest rates, and can be very lucrative for the parent company. For example, the bank Wells Fargo made more money from asset-based lending business then it did the rest of its corporate business (both lending and fee based services).
In fact, many financial services CEOs argue that normal lending to corporations can no longer be profitable in and of itself, because the interest rates involved are too low. This is because for most of the second half of the twentieth century, it has been possible for corporations to not borrow from banks but instead borrow from individual investors in the form of bonds. Thus, competition has made rates so low that many feel they do not adequately reflect the risk (see: risk based pricing). Most financial services companies now only lend as part of a package of services, or do asset based lending or other more lucrative businesses.
This type of lending is usually done when the normal routes of raising funds, such as the capital markets (selling bonds to investors) or normal unsecured or mortgage secured bank lending is not possible.
Thus, assetbasedlending can be compared to sub-prime lending.
This is because for most of the second half of the twentieth century, it has been possible for corporations to not borrow from banks but instead borrow from individual investors in the form of bonds.
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