What Is an Asset Based Loan?

Most people will struggle with financial hardship at some point in their lives, and everyone handles it their own way. Some people will “tighten their belts” and focus on spending less money, others might have to find ways to earn extra cash, and still others might look to loans to keep them afloat until their income stream returns to normal. There are tons of different types of loans available to businesses and individuals, so picking the right one might seem overwhelming. One loan some people don’t know much about is an asset based loan, but it could be exactly what they need.

Asset-Based Loans

These types of loans aren’t based entirely off of credit scores like other loans. Instead, lenders will take stock of certain personal assets and use them as collateral in the loan. This way they know they’re guaranteed some type of return on their investment if you default on the loan or are unable to make payments. For example, you might borrow $10,000 and use your car, which has the same value, as collateral. If you miss payments on the loan or cannot repay it, the lender would be within their rights to repossess your car. Although this is one example, most likely the lender will require you to use liquid assets, such as cash or a savings account, as collateral instead of a physical item.

How It Works

Many businesses use this type of loan to cover costs during months where their cash flow is less than expected. If they don’t have enough incoming revenue, an asset-based loan is a way to cover costs for a month or two until the expected payments come in. It’s convenient for companies that might have multiple contract with different pay dates because if a payment is missed or late, they can still secure the money to continue operating until it comes in.