The secured finance industry already knows the distinction between these two lending strategies. But these terms are often used interchangeably in public commentary, pitch materials, and industry conferences. If you are a capital allocator trying to capture the strengths of asset-based lending, or a regulator trying to understand what should be considered an asset-backed strategy, you have your work cut out for you.

The two approaches are structurally different, operate on different legal and credit principles, and play distinct roles in how capital gets to work in the economy. The secured finance industry needs to do a better job in clarifying which type of lending we’re talking about, so each can receive a proper evaluation of risk, scale, and return potential.

To that end, let us start with definitions.

Asset-based lending is a form of secured financing rooted in the ongoing operations of a business. The borrower is typically a company that needs working capital to fund its day-to-day functions. In these deals, the lender extends a revolving line of credit based on a borrowing base that is tied to the value of short-term operating assets. These usually include accounts receivable, inventory or, in some cases, equipment.

The lender monitors these assets closely and adjusts the borrowing base accordingly, often requiring frequent reporting. Here is one of the most significant distinctions of asset-based lending: repayment in this model is supported not just by the assets themselves, but by the operating health of the business. If the company falters, the lender may have to step in and liquidate the assets, but the primary goal is to keep the business running and the collateral turning over.

In the UK, asset-based lending evolved from earlier forms such as balance sheet or debenture lending, where assets like AR, Inventory, M&E, and property were assigned fixed percentages with minimal diligence. The early 2000s saw a shift to more detailed due diligence, often external, and the creation of robust borrowing base structures.

Asset-based lending as a product is mainly established in the UK, Netherlands, Germany, and to some extent Belgium. Other European countries tend to offer factoring or AR finance as the base product, with separate lending products for other asset classes.

Asset-backed lending, by contrast, centers on lending against a pool of assets that are isolated from the operating entity. These assets are often placed in a special purpose vehicle that is bankruptcy-remote. In other words, if the original company goes bankrupt, the assets in the special-purpose vehicle are less likely to be affected.

The lender’s exposure is not to the business as a going-concern, but to the performance of the asset pool. Mortgage-backed securities are the classic example, but other types of asset-backed lending include securitized credit card receivables, auto loans, or even leases on aircraft or shipping containers. In many of these cases, the operating company could cease to function and the asset-backed facility could still perform, because the assets generate their own cash flows and have been legally separated from the original owner.

You may also hear the phrase “asset-backed finance,” which is often employed as an umbrella term for both asset-based and asset-backed lending. Asset-backed finance is best viewed as a broad term, rather than a derivative.

The fundamental differences between these two models shape how risk is underwritten, how capital is deployed, and what kind of investors each strategy is suitable for. Asset-based lending is typically more relationship-driven. It’s up to the lender to understand the borrower’s industry, cash flow profile, and management team. In turn, these deals often require more intensive monitoring and ongoing diligence.

Matching strategy to investor

Gibraltar Business Capital’s recent partnership with Prodigy Health is a great example of the relationship-driven nature of asset-based lending at work. Prodigy Health, already a provider of specialty biopharmaceuticals to hospitals, was expanding into the broader retail pharmacy distribution space through the acquisition of Mockingbird Pharma and Cochran Pharmaceutical. Once engaged, Gibraltar’s credit team took a deep dive into Prodigy’s assets, particularly its accounts receivable and inventory. They found value and liquidity that a traditional lender might easily have overlooked.

The result was a $25-million credit facility to support Prodigy’s acquisitions, reinforced by confidence in the underlying health of the business and close monitoring of the secured assets. Deals like this are a boon to the middle market, where companies may not be able to attract traditional bank credit, or where the need for flexible and responsive capital is high. From an investor’s standpoint, the return profile is supported by senior secured exposure and real-time visibility into asset performance.

Meanwhile, asset-backed deals are designed to be standardized, rated, and packaged in ways that allow for institutional participation at size. Because the risk is isolated to the asset pool, the underwriting has a narrow focus on expected asset performance, historical default and recovery rates, and structure-specific legal protections. Asset-backed lending appeals to asset managers and insurance companies seeking exposure to secured credit without the operational complexity of direct lending to businesses.

When interests align 

Asset-based lenders have been known to partner with asset-backed lenders to provide a capital solution to a borrower that offers the best of both worlds. A recent example is the partnership between PNC, a leading middle market asset-based lender, and TCW, a global asset manager with expertise in direct and structured credit. Their joint platform will offer both asset-based and cash-flow-based loans, demonstrating how complementary lending models can be combined to expand financing options for middle-market borrowers. Likewise, asset-backed lenders can provide referrals to asset-based lenders and vice versa when the situation warrants. A number of private credit, asset-backed providers have entered the direct asset-based lending space as a way to diversify risk and deploy capital. Ares Capital Corporation, Apollo Global Management, and Blue Owl Capital are a few examples that have thrived in both ecosystems.

The value of clarity

The line between the two types of lending is not always clear. A special-purpose vehicle might try to separate the receivables of a hospital from its operating health as a business. This, by definition, is asset-backed lending. But the receivables are tied, by nature, to the hospital. If the hospital goes into bankruptcy, the impact on its receivables is unavoidable.

The secured finance industry does the world no favors when “asset-based” and “asset-backed” are used as interchangeable terms. Some of the biggest names in private markets will use these terms, or asset-based finance, or specialty finance to mean the same thing. We have seen term loans backed by hard assets like railcars or equipment referred to as asset-backed, even though they maintain a direct lending relationship with an operating company. Others might use “asset-based” to refer to any secured loan.

This is not just a technical concern. It affects how allocators think about portfolio construction. A portfolio tilted heavily toward asset-based strategies can offer strong, risk-adjusted returns, but it comes with greater operational intensity and a reliance on deep, ongoing relationships. Investors need to understand where each strategy sits in the capital stack, what legal and credit protections are in place, and how the strategy aligns with their risk tolerance and return expectations.

The confusion also limits the visibility of asset-based lending as a standalone asset class. While the asset-backed market has scale, standardization, and widespread investor recognition, asset-based lending is still sometimes seen as niche or opaque. Yet, with over half a trillion dollars of current outstanding loan obligations, it plays an essential role in funding the middle market and supporting sectors that form the backbone of the U.S. economy.

The middle market makes up about a third of U.S. private sector GDP and accounts for over 30% of private jobs. These are companies that are too small for the syndicated loan market, too complex for traditional banks, or too dynamic for passive capital solutions. But they still need capital to grow and function.

Asset-based lending meets this need. It is a hands-on solution that depends on engagement and relationships to drive returns. It is critical to a healthy credit ecosystem. When secured finance leaders engage with investors and middle-market businesses, we should give asset-based lending the clarity and respect it deserves.