What is an Asset-Based Loan?
An asset-based loan is a special kind of loan. A bank or other money lender gives this loan to a business. The business uses the loan money to buy necessary stuff it needs, like:
- Stock items to sell
- Machines and tools
- Gear and other things that last a while
The critical point is the stuff can’t be property or buildings. It has to be movable things.
How Asset Loans Work
So here’s the deal with asset loans: The bank wants to ensure repayment, right? Well, they use the things the business buys as a backup plan.
If the business can’t repay the loan, the bank gets dibs on the stuff the loan bought. They can take it and sell it to get their money back. That’s what makes these loans different.
Two Flavors: Recourse and Nonrecourse
Asset-based loans come in two types: recourse and nonrecourse. Here’s what that means:
Recourse Loan
- If the business can’t pay, the bank takes the stuff bought with the loan
- But if selling that stuff doesn’t cover the whole loan, the bank can still chase the business for the rest of the money
- The business is on the hook no matter what
Nonrecourse Loan
- Again, if the business can’t pay, the bank takes the stuff
- But this time, that stuff is all the bank gets, even if it doesn’t cover the total loan amount
- The business doesn’t owe any extra – the stuff was the only guarantee
So, nonrecourse loans put a hard limit on what the business might owe. With recourse loans, the sky’s the limit.
Why Businesses Like Asset-Based Loans
You might wonder why a business wants a loan where they could lose their stuff. Well, there are a few good reasons:
More Straightforward to Get Than Other Loans
Regular loans consider the business’s income, credit score, etc. Asset loans care more about the stuff being bought.
The loan is a safer bet for the bank if that stuff is worth something. They’re not as picky about the business side of things, making these loans more accessible.
Can Help Businesses Grow
Asset-based loans allow businesses to buy the gear they need to grow and do more business. For example, they might need many new machines to make more widgets or a fleet of trucks to ship more gadgets.
Without these loans, they might be stuck—unable to grow because they can’t afford the things that would let them grow. It’s a Catch-22. Asset loans fix that.
Doesn’t Tie Up Other Money and Assets
Businesses often have money and other assets tied up in day-to-day stuff. They need that cash and collateral for regular expenses and to qualify for different loans and credit.
With an asset loan, the stuff bought is the collateral. The business doesn’t have to put up other money or assets to secure the loan, so those other assets are still accessible for different purposes, providing more flexibility.
The Nitty Gritty: How To Get an Asset-Based Loan
If you think an asset-based loan might be right for your business, here are the steps:
- Figure out what you need. Please list what your business could buy with the loan to help it grow, including research costs.
- Check your assets. Look at your business’s current assets. An asset-based lender will want to see that your company has some value in case you can’t pay the loan.
- Shop around. Different lenders offer different asset-based loan options, interest rates, and terms. Compare to find the best fit.
- Prep your paperwork. Asset-based lenders will want to see your business plan, financial reports, and details on the assets you want to buy. Get it all together.
- Apply. Contact your chosen lenders and complete their loan application process. Be ready to discuss your business and loan needs.
- Review and sign. If approved, review your loan offer carefully. Ensure you understand the interest rate, loan term, and fees. If it looks good, sign on the line.
- Buy your stuff and grow! Once you have the loan, use it to purchase the necessary assets. Put them to work, helping your business succeed.
Remember to make your loan payments on time—you don’t want to lose your shiny new stuff.
A Few Things to Watch Out For
Asset-based loans can be super helpful for businesses, but there are some potential downsides and risks to keep in mind:
Higher Interest Rates
Since asset-based loans are often made to businesses that might not qualify for other loans, they tend to have higher interest rates. The bank is taking on more risk, charging more to make it worthwhile.
Shorter Repayment Terms
These loans also often have shorter repayment periods than some other business loans. You might have to pay back the money faster. That can put a strain on cash flow if you’re not careful.
Risk of Losing Assets
The big one – if your business hits a rough patch and can’t make loan payments, you could lose the assets you put up as collateral. For a company that relies on those assets to operate and make money, that could spell big trouble.