Asset loans refer to loans secured by assets. In other words, in asset-based loans, the loan provided by the lender is secured by the borrower’s asset (or assets).
If you’re confused by the number of times the word asset is mentioned, you’re not the only one. But there’s more to asset-based lending than meets the eye. It comes with more benefits and complexities that you can reap the reward of.
Read on to know more!
What are Asset-Based Loans?
As mentioned earlier, asset-based loans are secured by the borrower’s assets. A few examples of assets used to guarantee the loans would be:
- Real Property
They’re considered less risky for lenders as some collateral can be banked upon if the loan is not repaid. Compared to their opposite – unsecured loans – secured loans are a more attractive option for lenders.
The security is also why the interest rates on secured loans are lower. When lenders have something to bank upon if the money is not returned, they’re not attempting to make back the money through interest.
The interest rate dips lower if the liquidity of the asset is more substantial! When lenders can liquidate the asset quickly and get their money back, they’re not as focused on charging large amounts of interest.
How Do They Work?
Asset-based lending is simple in theory. When a company requires money and does not have the necessary cash flow or assets to pay a loan, they use physical assets as collateral.
With physical assets as collateral that the lender can liquidate, they can get approved for a loan with lower interest rates than an unsecured loan.
Many businesses have to take out loans or lines of credit to either supplement or help meet their usual cash flow. It can be for several reasons – staff costs, rent, equipment maintenance, and more.
Terms of an Asset Based Loan
Much like a traditional loan, asset-based loans also have different terms. The loan terms depend entirely on the asset provided as collateral and the lender. But, there are specific rules to the terms that you can bank upon.
Lenders prefer highly liquid collateral. Things like securities are significant collateral for asset loans—the greater the liquidity of the asset, the lower the interest rate on your loan.
But, the interest on your loan will also depend on factors such as:
- Credit history
- Cash flow
- Business length
Benefits of Asset Based Lending
Of all the benefits, increased liquidity is the most important one.
When using asset-based financing for your business, the liquidity of your assets can provide financial stability and a predictable cash flow. In the end, it helps companies to stabilise the rapid growth combined with low cash flow and seasonal income.
Applying for an asset-based loan is a lot faster and easier than applying for a regular loan or opening a line of credit. It generally takes a few weeks to prove that your company is profitable or has some semblance of financial control.
There are multiple cases where it might take longer due to complexities. However, there are fewer conditions, complications, and terms to deal with than regular loans.
Companies that use asset loans are usually in an intermediate growth stage. They have obtained factoring credit lines but cannot use traditional credit lines yet. As you strive to develop your business further, asset-based banking allows you to establish and improve your track record with lenders.