Monday 22 April 2024

The Pros And Cons Of Asset-Based Loans

If your business needs immediate capital to operate and grow, you might want to consider applying for an asset-based loan. If you have the assets to back it up, that is.

Asset-Based lending is a type of loan that is secured by some form of collateral such as equipment, inventory, accounts receivable, and other balance sheet assets. Businesses often apply for an asset-based loan if they are unable to obtain financing from traditional lenders or banks.

Contrary to popular belief, opting for asset-based loans doesn’t mean you sell your assets – you’re only borrowing against them. The lender can take your assets if you’re unable to pay for the loan.

If you’re not sure if an asset-based loan is right for your business, here’s a list of pros and cons to help you decide.

The Pros of Asset Based Loans

It’s easier to qualify for asset-based loans than other types of loans and business lines of credit. The only major requirement is to have assets that you can leverage. The collateral used by business owners acts as security to the lender.

Asset-based loans put your assets to good use. If your business has fixed assets on the balance sheet, you can use those to obtain additional working capital for your business. For example, if you recently purchased business equipment or inventory, you can use this to finance your business.

Compared to other financing options, asset-based loans offers greater flexibility. Asset-based lenders aren’t particular on how you use the funds as long as it’s for the benefit of your business. Additionally, the funds you receive may increase as the value of your assets grow over time.

Asset-based loans cost lower than other similar lending options, such as invoice factoring. The annual percentage rate (APR) is used in pricing asset-based loans. For invoice factoring, lenders price it by taking a percentage of the full value of the invoice.

The Cons of Asset-Based Loans

By qualifying for an asset-based loan, you risk losing valuable assets. Lenders can claim your assets if you fail to pay for the loan. They may sell your collateral to recover the money issued to your business.

Not all of your assets can qualify as collateral. Asset-based lenders have certain requirements for assets to be considered as collateral to use for a loan. Your assets must be of high value, has a high appreciation rate and low depreciation rate, and it has to be easily converted into cash when needed.

While asset-based loans are more affordable than invoice factoring, it’s more expensive than a traditional loan. Compared to traditional financing, the initial underwriting, monitoring, and collateral assessment is more thorough. Additionally, origination costs and loan administration increases the overall cost of asset-based loans.

If you want to know more about an asset-based loan, contact SMB Compass. We help small business like yours to get the funding and advice you rightly deserve. Don’t hesitate to give us a call at (646) 569-9496 or email us at [email protected].