Also known as an asset-based loan. A type of loan transaction where the amount the lender agrees to lend at any point in time depends on the value of specific assets that the borrower owns at the time, rather than the borrower's cash flows. This contrasts with cash flow lending, where the lender focuses on the borrower's historical and predicted cash flows to make decisions about whether and how much it will make available to the borrower as loans and on what terms. Asset-based loans, like many cash flow loans, are often structured as revolving loans (www.practicallaw.com/9-382-3774).
In asset-based lending, the lender typically lends up to an agreed percentage of the value of the specific assets (called a borrowing base). For example, a lender could agree to lend up to 80% of the value of the borrower's inventory of stock. Although there is no requirement for an asset-based loan to be secured, in many cases the assets in the borrowing base also serve as collateral (www.practicallaw.com/3-382-3343) securing the loan. However, although they often overlap, the borrowing base assets and the collateral fulfill separate functions and they are distinct concepts. The collateral secures the loan, while the borrowing base determines the amount of loans that the borrower can borrow and have outstanding at any point in time. Often, for example, the loan is secured by assets that are not included in the borrowing base, as well as all those assets that make up the borrowing base.
Historically, asset-based lending was provided by specialist lenders and was used by less creditworthy borrowers. The perception that asset-based lending was a financing solution for companies in poor financial health has changed in recent years. Asset-based loans are widely available, including from banks that did not traditionally offer them, and are often used by borrowers with good credit histories. Because asset-based loans are closely tied to specific assets of the borrower, they typically involve extensive reporting and monitoring of the borrowing base assets and are generally more expensive to borrowers than cash flow loans.
For more on asset-based lending, see Practice Note, Asset-based Lending: Overview (www.practicallaw.com/1-500-8019). For more on borrowing bases and borrowing base assets, see Practice Note, Borrowing Base: Overview (www.practicallaw.com/2-501-4029).