In the simplest meaning, asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, 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. Typically, these loans are tied to inventory, accounts receivable, machinery and equipment, but they can also include exotic things like the value of pharmacy script files, a trademark, or whole assets of intellectual 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 financial status. Thus, asset based lending can be compared to subprime lending. It is usually accompanied 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.
The sub-prime segment has provided a more recent exception to the challenges in deriving higher interest rate. Companies like Equirex in Canada take greater risks with business that cannot secure financing from banks.
Factoring of receivables, is a subset of asset-based lending and is often used in conjunction with a standard ABL facility which uses inventory or other assets as collateral. The lender mitigates its risk by controlling who the company does business with to make sure that the company's customers can actually pay.
Lines of credits to even riskier companies may require that the company deposit all of its funds into a "blocked" account. The lender then approves any withdrawals from that account by the company and controls when the company pays down the line of credit balance.