When Does an Asset-Based Loan Make Sense?

Asset-based loans have traditionally been considered last-ditch financing options for business owners. Yet in today’s changing financial climate, there may be some circumstances when asset-based loans can provide great benefits.

What is an Asset-Based Loan?

An asset-based loan is business financing that is secured by the company’s assets. These can be collateral in the form of tangibles like machinery and equipment or inventory, but they can also include accounts receivable or securities. The funding can be set up in many different ways like a traditional loan or a revolving line of credit, and lending amounts range from hundreds of thousands of dollars to hundreds of millions of dollars depending on the situation. Asset-based loans are sometimes considered risky as they carry interest rates 3 to 5 percent above standard commercial loans and they put the business’ assets in jeopardy if payments are missed.

The Exceptions to the Rule

Still, there are some circumstances where an asset-based loan can provide needed liquidity for working capital. Certain industries can benefit more than others. For example, businesses that maintain a large and consistent inventory carry less risk with an asset-based loan as their inventory’s value will remain higher than the loan value.
Asset-based lending can also provide more financial flexibility than other loans because the amount of capital available often grows as the company’s revenue and profits grow. Expanding working capital needs can be met much easier by asset-based lending in this situation than by standard loans.

With business credit being tighter in the post-Recession world, asset-based lending can be a finance tool for business owners to keep their firms running smoothly.


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