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Asset-based Investments: The Basics

November 3, 2015 • 2 min read

Asset-based investment, sometimes referred to as asset-based financing, is a form of investment that collateralizes company securities (i.e. commercial property, land, or physical assets) to obtain a financial loan.

How does asset-based financing work?

Here’s a quick example: SimplyGo is an electric car manufacturing company looking to expand operations in Texas. Although the company is profitable and sees a steady stream of revenue, it requires a financial backing to open a new manufacturing plant.

After much consideration, the company decides to apply for a business loan from the bank. The bank approves the loan but acquires SimplyGo to put its current manufacturing plant in California as collateral in case the company doesn’t meet interest and principal payment deadlines.

More than 10 years after the financing has been approved and SimplyGo has become a national success, the bank releases the asset-backed financial security of the company.

The scenario is a relatively straightforward example of how companies can use their personal assets as collateral to obtain additional financing.

When are asset-based investments used?

In general speaking terms, companies and individuals use asset-backed investments when they have exhausted their credit limits. Although this gives the company or individual more flexibility, it still comes with a high capital risk.

In some instances companies or individuals aren’t able to make interest and principal payments, allowing banks to seize any capital securities or items put up for financing.

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Why is asset valuation important?

Valuing company assets allow the company and executives to determine the true value of the company through its many different assets. The same goes for high-profile investors. Valuing assets are divided into two main categories, tangible and intangible assets, which are treated differently but contribute to the overall value of the company.

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