What is Asset Based Lending?

Asset based lending is a method of funding in which a borrower obtains money or credit by using assets as collateral. Because it’s secured by collateral, it’s easier to obtain than traditional, unsecured loans; thus, making it a popular funding option or entrepreneurs and owners of startup businesses. To learn more about what is asset based lending and whether or not it’s right for your business, continue reading.

What is Asset Based Lending?

Asset Based Lending: The Basics

As explained by Investopedia, asset-based lending is characterized by the use of assets to secure the loan or line of credit. Also known as commercial finance, it requires the borrower to use one or more items of value as collateral. Potential assets used for this funding option may include real property, inventory, accounts receivables (unpaid invoices), company stock shares, etc.

Keep in mind, however, that you won’t receive the full value of the asset or assets used as collateral. Lenders typically offer a loan-to-value ratio of 70% to 80% on accounts receivables and 50% of inventory.

Benefits of Asset Based Lending

Because it’s backed by collateral, asset-based loans are easier to acquire than unsecured loans. Assuming you pay back the loan according to the terms set forth, you’ll retain ownership of your assets. If you default on the asset-based loan, however, the lender can legally acquire them. As a result, the lender has recourse in case the borrower defaults, which is why asset-based loans are easy to obtain.

Asset-based loans are typically more flexible than unsecured loans as well. Generally speaking, there are fewer restrictions regarding the way in which the money or credit can be spent. As long as it’s for business-related purposes, you can usually spend an asset-based loan however you like.

Furthermore, asset-based loans can be obtained more quickly than unsecured loans. If you need immediate cash to fund your business’s operations, you should consider an asset-based loan for this reason.

Disadvantages of Asset Based Lending

The only real disadvantage of asset-based lending is the simple fact that it requires the use of collateral. If you don’t have the necessary assets, you may struggle to secure a large enough loan for your needs.

With all things considered, though, asset-based lending is an excellent funding option for entrepreneurs and business owners. It’s easy to acquire, has a shorter approval time than unsecured lending, and there are fewer restrictions.

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