Pros and Cons of Asset Based Lending
When getting a loan, it can be a bit overwhelming to know how many options are really out there in the marketplace. Depending on your current financial situation, your net worth, how much money you need and what it is for, there may be certain loans that work better for you than others. One type of loan that works great for people who have a lot of assets is asset based financing. This method of offering up collateral in the form of inventory has its benefits as well as its downfalls.
There are many businesses that may be attracted to this kind of funding, especially if they have been denied for other kinds of loans. In addition to being a loan that is easier to get than a lot of others, it is generally a quicker process, allowing your business to use the money it was leant sooner. This can be a great option if you need the money quickly due to unforeseen events or a deal that you simply cannot pass up. Asset based financing also has a few downsides, though.
The first con of using this kind of financing is that the lender isn’t always going to accept whatever you have to offer up at collateral. This could prove troublesome to some companies, because they may not have anything that the lender wants, causing them to be in the same boat of being unable to find funding. Another disadvantage is that the asset being used as collateral may be valued a lot lower than its actual value, meaning that you may have to give up more collateral than you want to. This is because, in the event that you don’t make your loan payments, the lender is going to want something that they can sell to make a relatively quick profit anyway.
Compared to other kinds of financing, asset funding can have higher costs. This may be in part because of the convenience of getting the money more quickly than with other types of loans. There may be a higher interest rate involved, among other things, making it a less-than-ideal solution if there are other options for a business to pursue.
There are a few reasons that a business may want to take advantage of asset based financing the next time they need a loan. However, be sure to look into all of the pros and cons in detail to determine whether the benefits outweigh the risks in your particular case.