What You Need to Know Before Proceeding with Asset-Based Loan
Aptly named, asset-based loans rely on a collateral value put by the borrower. This includes real estate, equipment, inventory, and others. A top advantage of the asset-based loan is quicker approvals and funding delivery compared with conventional loans. However, it also incurs higher interest rates than conventional loans and risks losing collateral for defaulted payment.
An asset-based loan can be processed via syndicated loan processors through a loan provider.
Asset-based lending – the essentials
The money a lender is willing to put up for asset-based loans is directly based on the value of an asset put up by the borrower, which is deemed collateral to guarantee a loan. Approval depends less on the borrower’s credit score than on the asset value. In the case of default, the lender gets the right to repossess the collateral.
Asset-based loans are a traditional way to acquire business financing.
How does asset-based lending work
As stated, asset-based lending is composed of asset/s that will serve as collateral. This could be in equipment owned by the borrower, the business inventory, real estate, or unpaid invoices. After asset/s is put up as collateral, the lender will decide the amount of loan a borrower can get based on the asset’s value.
Lenders usually offer larger loans since the cost of monitoring an asset-based loan is similar regardless of the amount of capital.
The easiest way to understand asset-based lending is to think of the most common type of asset-based loan: the mortgage.
Asset-based loans put a physical asset for collateral in case of default – similar to mortgages, although businesses experience the same in the form of their commercial mortgage. For example, if you have a term (e.g., 30 years) and an interest rate (e.g., 5%), that will help your monthly payments until the loan is paid.
Possible assets for use as collateral
A business typically holds multiple assets that have value as collateral to acquire a loan. These include real estate, equipment, inventory, or even accounts receivable.
Real estate: In cases such as a bridge loan, real estate often serves as the collateral. Suppose you acquire a decrepit property with the intent of rehabilitating it. In that case, a lender can offer you a bridge loan secured by the future of the property being developed. Failing to make your mean that the lender would repossess the property being redeveloped.
Equipment: Equipment financing offers businesses equipment it needs while also using that equipment as collateral. Defaulting makes the payments mean the lender can repossess it.
Inventory: Inventory financing is used to purchase more for later sales. The inventory financed through this method serves as collateral. Failure to make payments means the lender can repossess the goods.
Accounts receivable: Invoice factoring is an asset-based loan that utilizes the value of your accounts receivable. The lender will pay you a percentage of the value of any outstanding invoices and, typically, will assume collection of the payments.
Putting up these assets as collateral against a loan naturally creates a big incentive on your end to defaulting. Losing your assets could be a fatal blow to your business. Have a sound plan for how you will pay back your loan before you do it.
Is asset-based lending right for you?
Asset-based loans are relatively easy to obtain regardless of personal or business credit. Using an asset as collateral assures the lender that they will recoup the loan’s value in the case of default. Through a syndicated loan processor, asset-based loans are easier and faster to approve and funded more efficiently than conventional term loans.