Asset-based lending is a type of business loan that is backed by collateral instead of based on the borrower’s credit score. In this article, we’ll explain what you need to know about asset-based lending.
What is asset-based lending?
Asset-based lending is based on the value of the asset that is put up as collateral to guarantee the loan. Approval depends on the asset instead of the creditworthiness of the borrower. If the borrower does not pay the loan, the lender can seize the collateral. An asset-based loan is typically secured by accounts receivable, inventory, real estate, or equipment.
How does it work?
Asset-based lending is based on the asset or assets put up as collateral. Once the asset is put up as collateral, a loan in the amount of an agreed-upon percentage is offered. Lenders prefer to work with larger asset-based loans because it costs them the same to monitor it no matter what the size.
In order to understand asset-based lending, let’s look at the most common type of asset-based loan: a mortgage. Typically, mortgages have an interest rate and a term that are used to determine your monthly payments. If you default on the loan, you put your property in danger of being repossessed.
In some cases, an asset-based loan may be structured as revolving credit. In this case, the lender determines the accounts receivable and inventory to create borrowing capacity.
Which assets can be used?
Businesses have many assets that could be used as collateral for a loan. Here’s a list of the assets that can be used:
- Accounts receivable
- Real estate/property
Obviously putting your business assets up as collateral gives you incentive to make sure the loan is paid. For example, if you were to lose your property, it could shut your business down. Before taking any loan, make sure that you have a plan to pay it back.
Advantages and Disadvantages of Asset-Based Loans
As with any other type of funding, there are advantages and disadvantages associated with asset-based loans:
- Easier to qualify for
- Approved/funded quickly
- Puts an asset at stake
- Risks your credit score/history
- May be viewed negatively by future lenders
- Has additional fees
Asset-based lending can be helpful when your business needs funding. However, in order to obtain this type of funding, you must be willing to put up one or more assets, which the lender can seize if you default. If you’re ready to move forward with an asset-based loan, contact My Commercial Capital today.