Asset-Based Lending

What Is an Asset-Based Lending?

How Does Asset-Based Lending Differ From Traditional Lending?

Traditional lending is a type of financing that is primarily based on the borrower’s ability to repay the debt through a predetermined schedule of payments. Credit scores, collateral and cash flow are the commonly-used metrics to determine a borrower’s ability to repay a debt-based loan. 

Asset-based lending, on the other hand, is a type of financing that is primarily based on the value of a borrower’s assets as collateral. While both debt-based and asset-based lending can be applied to a wide range of industries, asset-based typically applies to small businesses and individuals. On the other hand, debt-based is more commonly used by large corporations.

What Are the Benefits of Asset-Based Lending?

No Credit Checks: There is no need to waste time and effort trying to clean up your credit score before applying for a loan. Instead, lenders will focus solely on what you can offer in terms of collateral. 

Quicker Approval Times: Because asset-based lenders are primarily focused on the value of your assets, the approval process will likely be much quicker than it would be if you were applying for a debt-based loan. This is especially true for business owners who have valuable assets to offer as collateral. 

Better Options for Bad Credit: If you have a low credit score or have been turned down by traditional lenders, you may have a better chance of being approved for an asset-based loan. This is because asset-based lenders are primarily focused on the value of your assets, so your credit score won’t have as much of an impact on your approval.

Drawbacks of Asset-Based Lending

Asset Inspection: Unlike debt-based lenders, who are focused primarily on your ability to repay the loan, asset-based lenders want to make sure that the collateral you are offering is worth the loan. This often involves an on-site inspection of your equipment or property, which can be both time-consuming and costly. 

Risky Borrowers: While asset-based lending is a good option for borrowers with low credit scores or those who have been turned down by traditional lenders, it also attracts risky borrowers who have no intention of paying back the loan. Because asset-based lenders are primarily focused on the value of your assets, they are often willing to take a much higher risk than debt-based lenders. It means that such lenders may have strict rules in case of default. 

What Is Considered an Asset for an Asset-Based Loan?

It is important to note that not all assets are considered equal. While some assets will likely be more valuable than others for the purposes of an asset-based loan, the value of each asset will vary from one lender to another. However, there are a few types of assets that are commonly used for collateral in an asset-based loan.