Benefits of Asset-Based Lending
If you are looking for financing for your business, you have two major categories of loans to consider: credit-based and asset-based. Each has its benefits and drawbacks. Many people first consider credit-based lending because there is no need to put up collateral. However, this may not be the right option for your business.
How an Asset-Based Loan Works
Asset-based lending is any type of loan that is backed with an asset as collateral. This may be real estate, equipment, inventory or anything else with value. In some cases, it is the item that you are buying with the loan. In other cases, the collateral is a separate asset used to secure the loan.
Collateral is typically tangible but, in some cases, intangible assets may be used. Additionally, it can be a single asset or multiple, as in the case of inventory. In other words, an asset-based loan can be backed by anything the lender will accept as collateral.
Why Take Out an Asset-Based Loan
There are some great reasons to consider securing your loan with your assets. You are reducing the risk for the lender. Therefore, you can often secure more money in the loan at a lower interest rate.
If you are confident about repaying the loan, you will likely save money by opting for an asset-based loan. Additionally, you will be more likely to qualify. In some cases, specific loan types must have collateral such as some SBA loans and real estate loans.
In some cases, you may be able to avoid making a down payment. Additionally, you can often avoid personal credit reporting, a common issue for small business owners. In other words, the entire borrowing process is enhanced by using an asset-backed loan other than the fact that you have to put up collateral.
By far, the main drawback of an asset-based loan is that the lender can use the collateral to pay off the debt if you default. This means you could find your business without a building or equipment.
Additionally, you are limited by the value of your assets. You may be able to have more active loans based on your credit.
What Should You Do?
Overall, asset-based lending can be a superior option. However, you need to carefully consider whether you may have any issues repaying the loan. Additionally, you will need to find an asset that the lender will accept. Nonetheless, this is worth consideration.