Occasionally, small business owners experience brief periods of financial strain. This may occur when there is a small disparity between money coming in and money going out. When small business owners experience these lags, they may be able to obtain a short-term loan by using business assets. Lenders of these types of asset-based loans typically only accept specific types of assets as collateral.
One of the most common assets used as collateral for an asset-based loan is accounts receivable. Generally speaking, lenders of these types of loans will only accept accounts receivable as collateral if they are under a certain date range, which is typically 60 days. Lenders will usually accept accounts receivable as collateral at a discounted rate of the actual value so that they may recoup a profit in the event the loan goes into default.
Lenders may also use equipment and vehicles as collateral for an asset-based loan. Unlike accounts receivable, these types of collateral are valued at an even greater discount than accounts receivable. Lenders may also request appraisals at the cost of the small business owner before using any equipment as collateral. Occasionally, lenders may use inventory as collateral. Before inventory can be used, lenders generally require small business owners to appraise and insure the assets. Like equipment and vehicles, inventory is valued less than its actual value. In fact, inventory is valued the least of all eligible collateral.
Many lenders that offer asset-based business loans have strict eligibility requirements. Although these lenders may be extremely stringent in their practices, they can offer business owners a quick cash injection when they need it. Business owners that are interested in finding the right solution for their short-term needs may benefit by speaking to a business law attorney. With their help, small business owners can find out if an asset-based business loan is right for them.