What Is an Asset-Backed Security (ABS)?

An asset-backed security (ABS) is a type of financial investment that is

collateralized by an underlying pool of assets—usually ones that generate a
cash flow from debt, such as loans, leases, credit card balances,
or receivables.

 These securities are backed by the assets–accounts receivables, inventories,

royalties–of the borrowers behind the individual loans.

Securitization
 Securitization is the process used to create asset-backed securities (ABS). It
takes the illiquid assets of a financing company (the leases, loans, mortgages
and credit card debts of its customers), pools them and transforms them into
highly liquid securities that are sold to investors.

The process benefits both the financing companies and the investors.

 For the financing companies, new capital is raised at more affordable rates than
they could get through their commercial banks. Better yet, they do that by freeing
up cash from assets sitting on their balance sheets. They also grow their loan
books by lending the capital back out to new borrowers.
 Investors not only benefit from the income that flows from the assets that “back”
the securities, but also from the liquidity of the securities themselves—the ability
to sell them to another buyer at any time.