Asset based lending can be a useful way for businesses to secure loans, but it is important to learn about them before applying for one. This article looks at the basics of asset based lending, covering its definition, advantages, and disadvantages.

Defining Asset Based Lending

Asset based lending occurs when a borrower puts up an asset or assets as collateral to secure a loan. Assets that may serve as collateral include inventory, equipment, balance-sheet assets, and accounts receivable, according to the Small Business Administration. If the borrower defaults on the loan, the lender can take ownership of the assets and sell them off to recover the money lost in the loan.

Advantages of Asset Based Lending

Asset based lending offers advantages to both the borrower and lender. For businesses with a shaky credit history or an otherwise non-stellar loan application, putting up collateral may be the only way to obtain the funding they need. Additionally, businesses may be able to obtain a lower interest rate on the loan with collateral. For lenders, asset based lending provides a means to recoup money if the loan isn’t paid back.

Asset based loans let businesses achieve the same goals as other types of loans, such as solving short-term cash flow problems or purchasing new equipment.

Disadvantages of Asset Based Lending

Asset based lending does have some drawbacks. One is the documentation and research necessary: It will take time (and therefore money) for a business to accurately report the value of any assets being considered for use as collateral. However, lenders will want that information before moving forward. Lenders may also value assets as lower than their market price, thus decreasing the amount of money they are willing to loan.

Another risk for borrowers is that they will lose the asset if they fail to repay the loan. Additionally, the temptation of an asset based loan may tempt borrowers to bite off more than they can chew financially.

To learn more about business financing topics, check out Black Wolf Capital Group’s other blog posts.