Asset-Based Loans: Understanding the Risks 

Asset-Based Loans: Understanding the Risks 

Owners of small to mid-sized businesses may find themselves in a position where cash is tight and funds are needed to pay for short-term operating needs. In these situations, an asset-based loan can be used to overcome cash flow troubles.  

What is an Asset-Based Loan? 

An asset-based loan is simply a loan that is secured by a company’s collateral. Collateral types that could qualify include accounts receivable, marketable securities, inventory, equipment, and real estate. 

The Upsides of an Asset-Based Loan 

There are three upsides to an asset-based loan. First, it is easier to obtain compared to a traditional bank loan or line of credit simply because the principal requirement is to have assets that can be leveraged based on their value. Second, this type of loan has great usage flexibility. There are typically few restrictions on how the funds can be utilized beyond being used for business purposes. And third, businesses can get this type of loan with a poor credit record. 

The Downsides of an Asset-Based Loan 

The first downside of an asset-based loan is that not all assets qualify as collateral. To be approved for a loan, assets must have a high value or a high rate of appreciation, a low depreciation rate, and be easily convertible into cash. Further, this type of loan has a higher cost than a traditional loan. 

The Risks of an Asset-Based Loan 

The risks of an asset-based loan are: 

• There can be a low valuation of the collateral which could result in owing more for an asset than it is worth in equity.  

• If the loan cannot repay the lender may seize the asset.  

• This type of loan does not build a business’s credit score.  

• A lender may require intensive asset value monitoring.   

Seek Expert Financing Assistance 

Contact Atlas Capital Solutions for expert financing solutions. Our team of seasoned professionals helps businesses navigate the alternative financing landscape to get the funding that they need to operate and grow.