Asset-based loans are usually short-term, usually lasting up to 12 months. They are called revolving credit facilities which means, a lender and a borrower agrees on a maximum lending limit based on the borrower’s assets.
Helpful Article: Tapping Into Revolving Credit
An asset-based loan uses a business’ assets or the director’s personal assets as security against the loan. Assets vary from business to business and may include items such as:
- Real Estate
- Accounts Receivable
Asset-based loans are easier to secure than traditional bank loans, however, like in any other loan type, potential borrowers need to meet some general criteria.
A company must have valuable assets that can be used as collateral on a loan. Some assets have higher value and more preferred than others. For instance, accounts receivable are good security against an asset-based loan and lenders prefer them because:
- An invoice has a clear and stated value.
- They easily become cash once a customer pays.
- Wait times for invoices to become cash is typically short.
The worth of a company’s assets differs greatly. There are assets whose value is easier to determine, which lender prefer. There are also those that are worth something to the business, but whose value is harder to determine by a lender. Such assets do not make great collateral. These can include:
- Unfinished products
- Damaged inventory
- Past-due accounts
- Intellectual property
Borrowers with such properties can still apply for an asset-based loan and still get an approval but the value of the loan will be less and the terms will be different as well.
Asset-based loan is a great avenue to get faster working capital and will work for many types of business, regardless of size. This is especially true for businesses in the retail, wholesale and manufacturing industry as it is easy to identify the worth of their products.