Asset-based lending is a form of a loan that is an alternative to bank lending, where lenders carefully evaluate a company's assets (receivables, contracts and inventory) to determine the credit limit a company can receive. If the company is successful, the lender increases the credit limit.
This form of lending is used for companies extending their growth patterns. Over the years, banks have tightened their lending, thus making it difficult for companies to borrow. Asset-based lending companies have taken advantage of bank drawbacks from lending and have seen it as an opportunity. Many businesses that use asset-based lending are plants, manufacturing and distribution companies. These companies have persistent and healthy receivables, which grant them the accessibility to borrow through asset-based lending. Many companies that use asset-based lending have revenues of $20+ million or greater. Asset-based lending can also be used to meet company needs in areas such as payroll and inventory.