An asset based loan is usually extended for a short period of time, usually from three to twelve months. It is secured by some kind of collateral-an asset or combination of assets that the borrowing company owns. That collateral could be a physical object such as a piece of commercial equipment or it could be a soft asset such as a company's accounts receivable or even the company's stock portfolio. Should the borrower default on the loan, the asset would be confiscated by the lender.
Most such loans are not extended for the full value of the asset. Generally, lenders will only lend an amount equal to fifty to sixty percent of the asset's appraised value. If the borrower does not repay the loan and the lender has to confiscate the asset, that asset will generally then be sold to recover the investment. If the item does not sell for the amount left owing on the asset based loan, the lender could go on to sue the borrower for the remaining amount plus court costs.
Why would a small business want to take on this type of loan instead of seeking some more traditional type of corporate credit? There are almost as many reasons as there are types of businesses. The primary reason is to increase cash flow for the business. Many companies experience times when their revenue stream does not match their expense stream. In other words, money may not be coming in but the company's bills must still be paid on time. An asset based loan allows a business owner to bring those two streams into sync. It provides the business with enough cash to keep operating until the revenue stream picks up again.
In other cases, a company may find that it is on the brink of a major growth opportunity but it lacks the funds to take advantage of it. An example of this would be a new customer phoning in a large order that the company cannot fill without buying a large amount of raw product to create their finished product. An asset based loan can usually be processed quickly, allowing the company owner to take advantage of that special order, buy the raw product it needs, thereby growing his business.
Once a company has successfully repaid this short term loan, it may find that it has improved its credit score to a point where it will better qualified for more traditional types of financing in the future. But while it is building that credit score, the company can find these types of loans from a variety of sources. Private lenders are often interested in providing loans based on a company's assets because they will always recover their investment in one way or another. If the business is a small family run operation, other family members who are familiar with the owner's work ethic and operational record might be willing to extend a loan based on a piece of equipment. Finally, many online finance companies are willing to make these short term loans.
Any small business that has assets of any kind should be able to find this type of loan when they need one. Interest charges and fees are usually negotiable, and the result of a successful pairing of a business with a lender is almost always a happy one. Business grows, customers are satisfied, and everyone makes a profit. What could better than that?
Corporate Credit Concepts specializes in Asset Based Loan. For more information about Asset Based Loan and how it might benefit your business, please CLICK HERE for a free phone consultation.