Need Cash Fast? Consider Asset-Based Loans

By: Edwin Linares

When faced with an immediate financial crunch, businesses, and even individuals, turn to asset-based loans for short term relief in their financial woes. Asset-based loans are loans secured by the borrower's physical assets like real estate, equipment, accounts receivables or inventory.

In asset-based loans, the 'asset' collateral maintains ownership with the borrower. However, in the occasion that payments are not settled on time and in full, the lender has the right to sell or seize ownership of the collateral. It is for this reason that lenders of asset based loans are particular on the type and nature of the physical collateral being offered by the loan applicant. By all means, the collateral must be in demand in the market and should have the potential to be sold off at any point in time.

Asset-based lending may also be referred to as 'equity based' lending.

The unique element of this type of loan is the ease of the loan application process. The loan applicants for asset-based loans may have poor credit history, if any at all, with insufficient income to guaranty the loaned amount.

Asset-based loans are generally utilized for two purposes. First is for a quick cash solution to a financial woe or crisis. Second is that it allows businesses to finance opportunities available to them at the present time while establishing credit integrity with lending institutions for a more long-term, and possibly, better-deal loans in the future.

Sounds good, so far? Wait. Let's take a little more time to understand this asset based loans before you jump to the conclusion that this type of loan is the perfect solution for your business.

Asset-based loans control possible losses. Because of the nature of this type of loan that specifically assigns equipment, real estate, inventory, etc. as collateral, in the event that the borrower is unable to pay, there is no complication and confusion as to what property / asset is to be seized. The borrower merely writes off the specific assets from their balance sheet. This prevents disagreement between both parties.

Asset-based loans are popularly utilized for business expansion. Many medium-sized businesses find themselves strapped for liquid cash to invest in, say, more equipment or inventory, as their business funds are tied into existing assets. In order to support the needed growth, asset-based loans provide this additional cash.

Regardless of the fact that asset-based loans are generally more popular among the smaller scale businesses, being an established business with firm financial statements and an adequate reporting procedure are typical qualifications for asset-based loan applicants. Fixed assets are preferred as collateral, but receivables, inventory and other products may also be considered.

A disadvantage of asset-based loans is the cost of borrowing. Simply put, it is more expensive to grant asset-based loans than it is to grant traditional loans. The reason behind this is that the lender's influence in times of non-payment is confined to the applied asset. Therefore, lenders are critical in assessing the amount of loan that corresponds to the collateral.

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