If your business needs a significant capital boost quickly but cannot satisfy the lenders about your ability to pay the debt through normal cash flow, you can still raise the funds you need through asset-based lending. This is done by pledging some assets to the lender to raise the funds you need. The asset could be anything with a good value attached to it, such as some equipment, a piece of real estate, bonds, stocks, etc. The lender can use the asset to recover the loan amount if repayment is not possible.
This is a form of alternative funding for businesses to help them raise hassle-free loans by using their own assets. Lenders are never averse to providing asset-based lending as there is little risk of losing money in case of non-payment. Lenders prefer liquid assets such as stocks, bonds, mutual funds, treasury bills, and Exchange-traded funds as they can be easily converted to cash.
How It Works
Asset lending is the process of borrowing money by pledging assets of value to the lender. The funds can be used for purchasing essential needs such as office equipment or vehicles. If the loan is not repaid as per the terms of the contract, the lender can legally seize the pledged assets. It is an alternative lending process that differs from traditional lending in some ways.
There are various types of asset-based lending contracts. Each one could have a different approach and structure.
- In asset finance and leasing type of arrangement, the lender buys the asset and leases the same to your business for a fixed monthly amount.
- In hire purchase asset finance, your business will pay a fixed amount as a deposit and monthly installments for the term of the loan. You get the assets back at the end of the loan term.
What are the advantages of Asset-Based Loans?
- There are many benefits of using asset-based loans to fund your business needs.
- They are easier to get sanctioned than traditional loans
- As the repayments are in the form of fixed amounts, you can plan them easily
- The rate of interest is fixed in most instances
- You will only lose the asset and nothing else if repayment is not possible
What are the disadvantages of Asset-Based Loans?
- It can be more costly than buying some assets
- An extended period of repayment depending on the loan amount availed
- Value of any purchases made using asset-based finance cannot be deducted from profits for tax purposes
Asset-based loans are one of the popular business funding solutions for companies that hold valuable assets. Loans availed through highly liquid assets generally have higher LTV or loan-to-value ratios. The interest rates are also favorable to the borrowers, and they can enjoy flexible terms of repayment.
However, borrowers are not given the full value of the assets as loans. Some margin is held back to cover the cost of liquidation and other expenses if the loan amount is not paid back. It also helps the lenders discount the asset’s price so that it can be sold off quickly. The gap will also cover accrued interest costs, if any.