An asset-based loan is not based on an individuals credit score, but it backed by some form of collateral. In this article, we’ll tell you what you need to know about asset-based lending and help you determine if it’s right for you. The advantages are that the approval process is much quicker than a conventional loan. The disadvantages are that the interest rates are higher and you risk losing your collateral if you default.

How Does it Work?

This type of loan revolves around the collateral: equipment, inventory, real estate, or unpaid invoices. Once the asset is put up as collateral, the lender offers the borrower a loan worth a percentage of the value of the asset.

Typically, lenders prefer larger loans because the cost to monitor the loan is the same whether it’s large or small. The most common type of asset-based lending is mortgage loans.

In some cases, an asset-based loan can be used as revolving credit. In this way, the lender determines the “borrowing base” and therefore, the available borrowing power.

What Assets Can Be Used?

Businesses hold many assets that could be used to secure a loan:

Inventory

Equipment

Accounts receivable

Real estate

Putting up any of these is a major incentive to avoid defaulting on your loan. Losing any of these could be detrimental to your business. Make sure you have a plan to pay the loan back before accepting it.

Advantages to Asset-Based Lending

The main advantage is that it’s fairly easy to obtain, even if your credit isn’t stellar. The lender knows that if you default, they’ll still be able to recoup the money by repossessing your asset. Plus, these loans are funded fairly quickly.

Disadvantages of Asset-Based Lending

The main disadvantage is that you are putting your asset at stake. Additionally, defaulting has a negative impact on your personal and business credit. Finally, these loans have additional fees tied to them.

If you are considering asset-based lending as an option for your business, contact Quick Capital Funds to guide you through the process.