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Asset Based Loans
When company assets are used as collateral to secure a loan, they are commonly known as asset-based loans. A company will use different company assets such as its accounts receivable, balance sheet assets, equipment, inventory, real estate, or even patents in order to secure a business line of credit or loan. Asset-based loans are sometimes used to solve cash flow problems such as building their inventory or meeting their payroll.
The interest rate on this particular type of loan is less than those of a line of credit or unsecured loan. So should the borrower default on the loan, the lender has the legal right to seize their assets to recover the costs of that loan. Additionally, asset-based loans by a single asset such as a piece of machinery, or a combination of assets such as accounts receivable and inventory. So it is a flexible loan in that context.
Who is the typical Borrower?
Asset-based loans are extremely common in the real estate industry rather than hard money loans that are used for other reasons such as bridge financing. Bridge loans are normally short-term loans while hard money loans are one of the primary funding sources for individuals with a poor credit history. Furthermore, they are not always required to pay a higher interest rate.
Additionally, companies and organizations of all sizes can apply for this type of loan. It enables asset-rich companies to access the financing they need for expansion or it can benefit those businesses that have not met standard credit or liquidity requirements. The bottom line is that the typical borrower of an asset-based loan is a company or person that doesn’t conform to traditional guidelines and standards. In other words they:
- borrowed the remaining balance that the first mortgage loan did not cover from the seller after they deducted the down payment from the agreed-upon price
- cannot make the down payment on the purchase of a large piece of commercial property because it is undervalued
- do not have enough of a down payment for a large commercial property purchase
- have little, no, or poor credit
- may not have sufficient income for making their monthly payments and may need to repay the original lender out of that loan until their property is refinanced or sold, or until their income improves
Asset Based Loan / Financing Provides:
- borrowers with the ability to leverage their working capital
- buyout and re-capitalization
- growth financing
- inventory acquisition and operational expense payment funding
- short-term borrowing capabilities
Benefits to your company:
- less costly than standard term loans
- line of credit can be used whenever needed
- loan customization facilitates and is tailored to the needs of your business
- more competitive and cost-effective than other funding options
- payback increases the chance for future funding