Pros And Cons Of Asset Based Loans

Pros And Cons Of Asset Based Loans

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As a business owner, even those that go by-the-book and run a smooth ship can run into financial difficulties or crossroads.

This could be as a result of a downturn in the industry, misguided investments or simply because you’re in need of a temporary increase in cash flow in order to allow your business to grow.

In these times, if the essential cashflow crucial to running your business is compromised, you’ll likely run into problems keeping up with bills, inventory and employee wages, which could put your future at stake.  

As an owner, it falls on you to ensure that these scenarios don’t get out of hand, which is why many tun to financial entities such as banks or private money lenders for help.

Asset based loans are among the options when it comes to loans for business owners. It’s important to understand what you’re getting yourself into before consulting with a financial advisor as they’re known to be persuasive though at times, unclear. The following points will help you navigate the ins and outs of asset based loans.

What are Asset Based Loans?

Asset based loans are secured loans, meaning they are issued against a collateral. As the name suggests. The collateral here could be any asset deemed acceptable by the bank or lender.

With asset based loans, business owners can present their physical property or future earnings as collateral, or as the asset against which the loan is issued.

This means that in order to qualify for this type of loan, you need to have a certain level of property or assets at hand. The bank or lender then deems whether your asset is sufficient to have a loan issued against it.

Because the loan is secured, the bank or lender retains the right to seize and sell off your asset in the event you’re unable to make your payments on time.

Much like other secured loans, the turnaround time for asset based loans can be fast. However, unlike many other types of secured loans, it could prove to be expensive in terms of interest rates.

The Advantages of Asset Based Loans

From faster turnaround times to the ability to secure financing with no credit rating, here are few of the advantages to be gained with an asset based loan.

1. Faster Processing Times

As mentioned earlier, these loans can provide you with financing in just a few days time. However, keep in mind that this is subject to the accuracy of the details you submit.

2. Reliability

If you submit your application to a credible bank or lender and have strong collateral to offer, rest assured you will secure financing under most situations.

3. Funding Available Regardless of Credit Rating

Some lenders forego the business principals’ credit rating in favor of the asset they’re submitting. This means that even if you have a bad credit rating, you can still secure financing through an asset-based loan.

The Disadvantages of Asset-Based Loans

The disadvantages of asset based loans is every bit as important to know as the pros involved. These are a few of the most common risks associated to to this kind of borrowing.

1. Higher Interest Rates

As mentioned earlier, despite asset based loans being a secured loan product, they typically come with higher interest rates than other secured loans. This means that the longer the term of your loan, the more money you’ll wind up paying in interest.

2. Risk of Losing Your Assets

One disadvantage frequently at play with secured loans is the risk of losing your collateral. It’s the same thing with asset based loans. If you don’t repay your loan in time, you risk losing your assets. Simple as that.

Since the future success of your company can’t be tied to the financing of your asset based loan, things can go south. And when they do, and you aren’t able to repay your loan, you run the risk of losing your assets — which typically represent a much higher dollar value than the amount of the loan.

3. Loss of Privacy

Some lenders insist that you share your earnings and report your assets to them on a regular basis so they can monitor your financing and cash inflow.

This may seem like a reasonable request at first, but the micromanaging that comes with having your earnings audited and checked on a regular basis can be very frustrating, time consuming, and a hurdle to growth.

Make Sure You’ve Weighed All Your Options

To ensure you’re not walking into an asset-based loan agreement blindly, you should take these pros and cons into account, along with any associated factors that come to mind.

If you decide that an asset-based loan is in fact your best option, then make sure you have all the essentials at hand as you tackle the process.