In asset-based lending, a company pledges its assets as collateral for a loan.

"Asset-based lending uses the value of a company's assets to generate borrowing power," said William Hartmann, co-head of leveraged finance at Salomon Smith Barney.

The lender looks at a company's receivables, trademarks, patents, plants and equipment and at what the value of those assets would be if they had to be liquidated. The lender uses that value as the basis for the loan.

Asset-based lending assures lenders that there are assets that will be used in some fashion to repay the lender in the event that the company's profits or cash flow falls short.

Meanwhile, the borrower gets the cash it needs either for expansion or just to stay in business through a slow, or difficult, period.

With many economists looking for an outright decline in first-quarter U.S. economic growth, commercial paper and syndicated bank loan investors have demonstrated a distinct disdain for the paper of all but the most credit-worthy companies.

Companies with "event risk" written all over them have been shunned in those markets.

But companies can and have been meeting their financing needs by pledging assets ranging from factories to patents to accounts receivables as collateral for a loan.

U.S. retailer Ames Department Stores , which late last year saw its debt downgraded by rating agencies, recently replaced a $650 million senior secured financing facility from Bank of America with $800 million of senior secured financing from General Electric Capital Corp., the finance unit of General Electric Corp.

Investors have rewarded that move by pushing the discount retailer's shares up nearly 100 percent on Nasdaq from where they were before Ames arranged the new financing.

Rolando de Aguiar, Ames senior executive vice president and chief financial and administrative officer, said the larger credit facility reflected Ames' expansion since it put the smaller, Bank of America facility in place at the end of 1999.

Credit facilities can differ in other respects besides size. Lenders can appraise assets somewhat differently and they can include some assets and exclude others.

For instance, a bank whose total loan portfolio already has ample real estate assets, may not want to lend money against store leases or buildings, even if those assets do have value.

Also, one lender might be willing to lend against only a certain percentage of a borrower's inventory while another lender might be ready to lend against a higher percentage.

"The (three-year) GE facility gives me the ability to borrow against a higher portion of those assets," said de Aguiar. The bigger borrowing wallop is important to investors who want to be assured that you have sufficient borrowing capacity to get through the tough times," he said.

EXPERTS SEE STRONG YEAR AHEAD FOR ASSET-BASED LENDING

Manufacturing is in a recession and many retailers foresee a flat year. But for asset-based lenders, business is good.

"When the economy softens, this kind of lending jumps dramatically," said John Goldthorpe, executive vice president of Heller Corporate Finance, a unit of Heller Financial Inc. , a Chicago specialty-finance company. "Asset-based lenders are looking happy for the first time in many years."

As some banks have watched problem loans hurt profits, they have made it more difficult for companies to get a loan based on cash flow than it was a year ago, Goldthorpe said.

By leveraging its balance sheet, instead of its cash flow forecast, a company can get more money.

Salomon Smith Barney's Hartmann said he also expects to see more asset-based lending.

"The economy is down and earnings are challenged and that is typically when companies turn to their assets as a way of raising liquidity, of going through down cycles," he said. "It's also when lenders look to collateral  as a way to protect the loans they are making into higher risk situations."