Asset-based lending is a kind of loan that is protected by an asset. The borrower insures the lender through their asset/s. In simple words, if the borrower fails to pay the loan and fails to follow the contract, the lender can take their assets as compensation.
This is the safest and less-risky kind of loan, unlike unsecured loans that are not protected by assets. Another benefit is that the interest rate will be lower than the usual charge.
Assets to Be Used
Before you go for an asset-based lending arrangement, you must see if you have assets or properties that you can put up as collateral. Here are some of the assets good for asset-based loans:
- Real Estate Properties – The real estate that the borrower has paid for also qualifies as collateral for asset-based loans. If you plan to put up your real estate properties during loans, you have to get it appraised to see its value and to assess if it is good to serve as collateral for your loans.
- Accounts Receivables – If you invoice customers, you can put up the receivables due for at least 30-90 days as collateral. The greater the amount you have invoiced, the more you can borrow from your lender. That is because your assets are now of higher value.
- Inventories – If you own a business or if you’re in the retail industry, you can use your inventory as collateral. It would be even better if you have a lot of inventory with you. Your lender can raise the resale value in order to secure your loan arrangements.
- Equipment and Machinery – If you own a business, the expensive equipment and machinery you own can also be put up for asset-based lending.
Advantages and Disadvantages of Asset-Based Lending
Just like any other loaning arrangement, asset-based lending also has its advantages and disadvantages. You must learn if the asset-bend lending set-up would be more advantageous for you or not. Here are some of its pros and cons:
- Low-Interest Rates – Unlike other loans, asset-based loans have lower interest rates. This is because of your assets’ value, and this would also work if your credit records are good.
- Faster Application and Funding – Your loan process would be processed faster, unlike any other loan. As long as you are eligible from the lending criteria, your loan would be approved faster.
- Assures Financial Stability – Since asset-based lending is processed faster, you will receive the funds immediately when you need them. You can use the money to continue your business and avoid bankruptcy.
- Assets Are At Stake – If you choose to default or not pay your loan, your business assets will possibly be taken by your lender as compensation.
- Additional Fees – You might possibly pay for other fees, even if you have low-interest rates that come with asset-based loans.
- Limitations with Borrowing – The amount you can borrow will depend on the value of your assets.
Asset-based lending is very advantageous for small businesses. They can help assist and keep your business stable until the business can stand on its own. All you have to do is be diligent, and pay for the loan on time to avoid losing your assets.
If you’re just starting your business, it’s a good time to apply for asset-based lending. We, at Porter Capital, offer working capital solutions to businesses all over the US. We are a direct lender and factoring company that offers asset-based lending