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How Asset-Backed Finance Works: Real-Life Examples from the Lending Industry

One of the good things about owning assets is that it provides an alternative to secure funds if you ever run out of cash. One option is to sell the asset in question to obtain the money you need. However, for people who would prefer a non-permanent solution, using your asset as collateral for the loan is a great idea as well. 

But how does asset-backed finance really work? While most people tend to be familiar with traditional credit-backed loans, asset-based lending is a little more complicated. In this guide, we will explore the concept of asset-based loans, with real-world asset-backed finance examples to help you understand how this type of loan works. 

What is Asset-based Lending?

Asset-based lending is a financing method that allows a borrower to use an asset as a security for a loan. For this type of loan, lenders use the value of an asset or property to determine the borrower’s eligibility. This is in contrast to a conventional credit-based loan where the lender uses the credit history and cash flow of the borrower to determine eligibility. 

The type of asset that can be accepted as collateral varies from one lender to the other. While some private lending companies only accept conventional property assets like real estate and vehicles, others accept luxury goods like jewelry, wristwatches, and even artwork as loan collateral. 

In addition to determining the borrower’s eligibility, the loan amount that the lending company is willing to offer depends largely on the value of the asset being used as collateral. This type of loan is a perfect option for anyone looking to borrow money quickly without going through the complex process of obtaining unsecured loans or without a good credit score to support conventional credit-backed loan applications. 

How Does Asset-Backed Finance Work? 

Borrowers can access asset-backed finance through conventional banks and lending companies. Providers that offer this type of loan will typically indicate the kinds of assets they asset as collateral and the process for accessing the loan.

The most important requirement for borrowers interested in this type of loan is that they provide proof of ownership of a qualifying asset to be used as collateral. The lender will carry out an appraisal to determine the value of the asset and calculate the loan-to-value ratio. This determines the total amount that the applicant can get. 

Most lenders provide a percentage of the asset’s appraised value as the loan amount (typically 60 to 80%). This means if the asset is appraised to be worth $100,000, you will get $60,000 to $80,000 as the approved loan amount. 

Other terms of the loan (such as the interest rate and loan duration) depend on the asset's liquidity (how easily it can be converted into cash in case the borrower defaults on repayment). For highly liquid assets, lending companies typically offer higher funding and lower interest rates.

Asset-backed financing is generally easier to access compared to conventional credit-backed loans. This type of loan does not require complex paperwork and credit checks. As a result, the total loan application is completed within a relatively short period after which the approved amount will be disbursed into the borrower’s account.

Real Life Example

Consider a situation where Mr Smith needs about $40,000 for a short-term investment opportunity. While Smith has a stable job and earns up to $5,000 monthly, he doesn’t have enough in his savings to meet his needs. 

Smith does have a valuable Patek Philippe Gold wristwatch willed to him by his father. It is a valuable timepiece with an estimated market price of $80,0000. Since the watch was a precious gift from his father, Smith does not want to sell it permanently. He also doesn’t want to apply for a traditional credit-backed loan primarily because the loan process will be slow and the opportunity he intends to leverage might have been missed by the time the loan is approved. 

Based on this fact, Smith approaches AMETA finance group, a specialized lender that accepts luxury watches as loan collateral. He applies for a luxury watch loan, presenting his father’s Patek Philippe watch for appraisal. The application process is initiated online after which he has to ship the watch in question to the lending company for appraisal.

After receiving the watch, the lender has an expert determine the authenticity, condition, and market value of the watch. This is then used to prepare the loan offer that will be sent to Smith. The watch was appraised to be worth $80,000, meaning Smith can get between $46,000 to $64,000 as a luxury watch loan. 

AMETA sends an offer to Smith detailing the loan amount, the interest rate, and the repayment terms. Smith signs the loan agreement and the loan is disbursed directly to his account through a wire transfer within 24 hours of signing the agreement. AMETA holds the watch in a secure facility for the entire loan duration of 18 months. Monthly repayments are deducted through ACH or credit cards depending on Smith’s preferred method of payment. 

This type of loan gives Smith the liquidity he needs for his investment without parting ways with his watch permanently. As soon as the loan and other additional fees (interest, processing fees, insurance, and storage fees) are repaid, Smith gets his father’s watch back in perfect condition. 

The example shows just how simple the process of obtaining an asset-backed loan is. The borrower’s credit history and cash flow don’t influence the outcome of the loan application in any way. Below are some other benefits of applying for this type of loan. 

Why Asset-Backed Finance Is a Good Idea

As mentioned above, the fact that asset-backed loans don’t require credit checks is the biggest appeal of this type of loan to most people. Lenders with poor credit due to past bad loans or insufficient borrowing history can still qualify for this type of loan with no restriction. Additional benefits of obtaining this type of loan include: 

Scale - Unlock Higher Loan Amounts 

Asset-backed loans can unlock bigger loans than you’ll be able to get with conventional credit-based loans. Since the loan amount depends on the value of your assets, you’ll be able to get more money as long as you’re presenting a high-value asset as collateral. With AMETA for instance, the loan limit is as high as $5,000,000 which is higher than what you can get with most conventional options. 

Flexibility - Favorable Terms and Conditions

Unlike conventional loans with complex loan agreements, the terms and conditions of an asset-backed loan are relatively straightforward. The loan terms usually depend on the appraised value of your asset, which means each loan offer is customized for an applicant. Also, unlike some traditional bank loans where there are restrictions on how the loan can be spent, collateral loans are free from such stringent terms and conditions. 

Quick Process 

As highlighted above, the process of obtaining an asset-backed loan is pretty quick and straightforward. As long as you’re able to provide an asset that meets the eligibility requirements set by the lender, you will likely be approved for a loan. 

This is a huge advantage over conventional loans where loan applications can be declined due to poor credit scores and other factors. It also doesn’t involve any complex paperwork or credit checks. As soon as the asset’s value is appraised and a loan agreement is signed, the approved loan amount will be disbursed to the borrower’s account within 24 to 48 hours. 

Retain Ownership 

Asset-backed finance allows you to get the money you need while retaining ownership of your asset. As long as the loan and additional fees are repaid on schedule, the asset will be returned back to the borrower in perfect condition. This is a perfect alternative to selling the asset outright to meet a short-term financial need. It also helps you avoid the long process of searching for a buyer willing to pay your asset’s true value. 

Conclusion 

Asset-based financing is a flexible and efficient form of lending typically targeted at borrowers with qualifying assets. While this form of lending used to be informally provided by pawnbrokers, it is now an organized and well-regulated niche of the lending industry with specialized providers like AMETA providing access to loans with favorable terms. If you have an urgent financial need and you have a qualifying asset in your name, you can apply for this type of loan for a quick and seamless disbursement.