How Is Asset Based Lending Different: What You Need to Know

How Is Asset Based Lending Different: What You Need to Know

Asset based lending differs from other traditional forms of loans. Learn what it is and how it is different.

Did you know 30 percent of businesses fail because their owners run out of money?

If you’re currently in a cash crunch, you’re probably fearing the worst will happen. The good news is there are effective ways to raise some working capital and keep the business going. One of your options is to take out a business loan.

Now, there are different types of business loans, each designed for a specific purpose. An asset loan is among the most popular business loans.

How well do you know about this type of loan? Here’s a guide to asset-based lending.

Asset-Based Loans Are Secured

Broadly speaking, there are two types of loans: secured and unsecured.

Unsecured loans don’t require any collateral while secured loans do. Asset-based loans are secured against a business asset.

This means your business needs to own an asset, such as a car, equipment, or real property to qualify for asset-based financing.

During the loan application process, lenders will verify the ownership details of the asset you elect as collateral. If it has a tax lien or you already owe money against the asset, a lender will likely reject your application.

Also, the asset will go through a valuation process. This helps lenders establish whether the asset’s present market value is worth at least the amount of you’re borrowing. In most cases, though, you’ll get about 80 percent of the asset’s value.

Asset-Based Loans Are Cheaper

When you’re going in for a business loan, the interest rate is one of your biggest considerations. A higher interest rate means your business will make higher repayments. This increases your chances of defaulting, especially if your business’ revenues slump.

Asset-based loans usually charge lower interest rates than unsecured business loans. The lender knows they can repossess the collateral and sell it to recoup their money. As a result, the associated risk of lending is lower.

That said, it’s the responsibility of every borrower to research various lenders and find the one with the best rates.

Processing Times Are Longer

Asset-based loans have longer turnaround times as compared to unsecured loans. This is because lenders have to verify the ownership paperwork a borrower presents and conduct an independent evaluation of the asset.

It’s not unusual for an asset-based loan application to take a couple of weeks.

As a borrower, though, there are measures you can take to shorten the approval timeframe. For instance, ensure the information on the ownership paperwork is accurate. If your business has switched addresses since you acquired the item, update the information accordingly.

Yes, You Can Lose the Asset

A lot of small business owners who apply for small business loans don’t give much thought to the risk involved in asset-based loans.

If you default on your secured business loan, the lender can seize the asset and sell it off. Sure, this is usually a measure of last resort for most lenders, but it can happen if you leave your lender no choice.

Be sure to find out more about this type of lending before making an application.

Asset Based Lending Has its Pros and Cons

Asset based lending is available to all businesses that own a valuable asset, but it has its fair share of upsides and downsides. Now that you know how this type of lending works, you’re in a better position to make an informed borrowing decision.

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