In the course of running any business, it’s not out of the question that you may seek out asset-based loans at some point. However, it is important to understand the risks that come with doing so.
Not Every Asset Can Be Used As Collateral
Be careful when attempting to use your business assets as collateral, because some don’t qualify. Lenders mostly want you to use your higher value assets with low depreciation rates. Ideally, whatever you use as an asset should be able to be converted into liquid cash easily. One of the most popular assets lenders ask for is accounts receivable.
Asset-Based Loans Are Expensive
An asset-based loan will also cost more than a traditional loan would. One reason for this is the cost of gathering all the information and details you’ll need in order to get this type of loan approved.
Collateral Gets Low Valuations
Getting approved for an asset-based loan means that whatever you put up as collateral will be given a low valuation by the lender. If the difference between the actual value of your collateral and the value assigned by the lender is too great, the loan may not be enough to meet your business’s expenses. There are times when your collateral may go up in value once you’ve offered it to a lender. If this happens, it doesn’t mean the loan will all of a sudden be worth more. Basically, when you get an asset-based loan, the lender holds all the cards.
You May Lose Valuable Business Assets
Putting up collateral is a huge risk for your business if something goes wrong. It is guaranteed that if you default on an asset-based loan, the lender can and will seize your collateral and you’ll have no way to get it back. And if that collateral isn’t enough to pay back the loan, they will take assets you never even offered.
It Won’t Improve Your Business Credit Score
Even if you get an asset-based loan and pay it back promptly, it won’t improve your business credit score. For more information about asset-based loans please contact Spearing Capital & Consulting, Inc.