Everything You Should Know About Asset-Based Loans

Loans can differ from each other in many ways. Some have higher interest rates and/or amounts of capital than others. The types of collateral required can vary as well. Many loans require business owners to put up their own cash or capital. Others will allow business owners to put up their own assets. This type of loan is known as an asset-based loan. More information about this can be found below. 

What Is Asset-Based Lending?

An asset-based loan can be best described by its name. It is a loan that is made secure for the lender by the borrower offering their assets as collateral. Explained more simply, if a borrower can’t pay back a loan, they must give up items they own to the lender. This way, the lender won’t have to take the risk of suffering financially. They can make back what they are owed with the assets of the borrower. 

How It Can Work for Businesses

A business owner can approach asset-based lending in two ways. They can offer up their own personal assets as collateral to a lender. That is, they can use assets that they personally own (such as real estate) to keep a lender’s risk secure. Another option is to offer the assets of their business as collateral. That is, he or she can take an item that is used in his or her business to secure a loan. Examples of these assets include expensive equipment, inventory, and such. 

The Benefits of This Type of Loan

A business that utilizes this type of loan doesn’t need certain qualifications. Other loans may require businesses to have certain credit scores or amounts of capital. This isn’t necessary with asset-based loans. Lenders won’t have to risk their finances because they will still gain capital even if they can’t get back their money. 

The Downsides of This Type of Loan

Asset-based loans tend to have higher interest rates and fees than other types. Another thing to consider is that a company’s assets may get them as much money as they expect. An asset that is too old or small in amount won’t get as much as one with the opposite qualities. In this case, a lender may only offer a low percentage of the asset’s total value as a loan. 

As long as a business owner can handle the downsides of asset-based lending, he or she should consider it. This loan type can be very useful in helping their business succeed.