Asset-based loans provide companies with financing usingassets as collateral. Businesses that want capital for their renovation or expansion plans can benefit from this strategy. Consider the pros and cons of asset-based loans before you give this financing strategy a try. Here’s what you need to know before you proceed.
Upside: Loan Flexibility
Asset-based lending is more flexible. It doesn’t have the same limitations that traditional loans from banks do. The company can transfer the money to your account as soon as they assess and approve the application. That is much more flexible than bank loans with stringent requirements that often take days before a transaction goes through.
Upside: Cash Flow Boost
If you are financially on edge, an asset-based loan can provide a fast and instant boost to your cash flow. If you cannot afford to wait for days or weeks before receiving the funds you need, consider asset-lending services. If your company has assets, use them to secure the money you need to increase your cash flow. You can use those funds to pay your monthly bills or cover the cost of a financial emergency. Some companies typically acquire those funds to invest in equipment, renovations, or expansions. Others use the money to pursue time-sensitive growth opportunities.
Upside: Portfolio Improvement
When you apply and get approved for an asset-based loan, you can use that as an opportunity to expand your credit portfolio. A diverse portfolio is always better and safer, providing you with more ways to secure your revenue. Also, if you have no problems making those payments on time, that can improve your credit. Excellent credit comes in handy in the future if you want to apply for another loan.
Downside: Asset Loss
As with any other loan that uses a collateral, you run the risk of losing your asset if you fail to continue with the payments. If you are confident that the lender won’t be able to seize your asset, though, go right ahead with your plans.
Downside: Lower Valuations
Keep in mind that your asset will likely get a lower valuation. That’s true for most lenders. The valuation will be lower than how much the asset will go for if you sell it. Still, if you have no problems, you won’t need to worry about the lower valuation since you will succeed in keeping your asset. Still, a lower valuation means you may not the amount of money you were expecting for the loan, so check on that detail carefully before you proceed. If the arrangement puts you at too much of a disadvantage, walk away.
Downside: Over-Mortgaging Risk
When you apply for an asset-based loan, you are also at risk of overt-mortgaging. That happens when you keep putting your assets on the line to secure funds. That’s why the approach may work for a few times, but it would be best to figure out what’s causing the shortage in your funds. Address that problem instead, so you won’t have to worry about using your assets to get financing.
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