The Risks of Asset-Based Loans

As a business owner, there are times when cash flow declines make it impossible to run the company smoothly. This is especially common with small businesses whose financial capacity is not stable. With low cash flow, it actually becomes very hard to meet all the costs necessary to run a business operation.

When a business is in such a situation, there are several ways they can get themselves out of a financial crisis. One of the most common ways is by applying for a loan. Unfortunately, nowadays it has become very hard for small businesses to get traditional loans due to bad credit. Many financial institutions are not willing to give out loans to businesses with a poor credit record.

Due to this, lenders have come in to ensure that even a business which has a poor credit is able to access loans by using their Asset backed loans as collateral for the loan. This is what is referred to as asset-based lending. If a business has some valuable assets, the assets are used as collateral for the loan such that in case the business owner fails to repay the loan, the lender can go ahead and sell the asset in order to recover the loan. It has become one of the easiest ways for small businesses to get quick cash in order to continue operating.

The process of Asset backed loans is not as demanding as other methods a business can use to get a loan. However, it is not all seamless and easy when it comes to asset-based lending! It has its own disadvantages which every entrepreneur should know before using their assets as collateral for a loan. Here is a quick look at the pitfalls of asset-based lending to business owners.

Not All Assets Do Qualify as Collateral

The fact that asset-based lending uses the assets of a business as collateral does not mean that any asset can be used as collateral. Lenders also have certain terms that an asset has to meet before it is used as collateral for the loan. If you are running a business, there are some assets that are more valuable than others.

Most of the times a lender will want to give an asset which has a higher value, low depreciation rate and is easily convertible into liquid cash. This shows that not every asset will meet all these conditions. In recent times, lenders have been using the accounts receivables of the business as collateral for the loan in that a certain percentage of the daily sales is deducted to repay the loan. If the account receivables are not strong enough to be used as collateral then the lender will demand an asset to be used as collateral for the loan.

But remember not all assets can qualify to be used as collateral.

For an asset to qualify, it has to be of high value, low depreciation rate or high appreciation rate and easily convertible into cash. Those are the conditions that make an asset to be used as collateral when it comes to asset-based lending. This means that a business whose accounts receivables is weak and whose assets do not qualify will have a hard time qualifying for an asset-based loan.