The Qualifications for an Asset-Based Loan

Asset-based loans are given to a borrower who posts collateral with the lender. These loans have many advantages including a lower interest rate. The borrower is assuming a large part of the risk; the borrower provides a guarantee of funds to the lender in the form of the collateral. Because the lender is assuming less risk, the lender will be willing to fund the loan at a lower rate. The lender will also be willing to fund the loan even if the borrower is not as qualified.

Assets in Excess of the Loan Amount

You will not be able to get a loan for the full value of your asset. This is because the lender wants to ensure that they have guarantee against your default by holding on to an asset much more valuable than the loan. Typically, the more liquid the asset is, the better loan to value ratio you will get. In simpler terms: the easier it is to sell your asset for cash, the more funding you will receive from the bank or lender. The lender will quote you a limit based on the asset you would like to place as collateral. This asset can be a home, car, stock, jewelry or even a savings account. Anything that has a given value can be used as collateral for an asset-based loan. For a business loan, assets are more likely to be real estate or machinery owned by the company. 

Authority to Collateralize the Asset

You cannot collateralize an asset you do not own in whole or in part. Owning an asset out right means you or your business does not share a claim to the asset with any other person. If you own a business with a partner or partners, you cannot use that business's assets as collateral for another loan because the asset is not yours to collateralize.

This especially comes into play when you are seeking a loan against an asset you currently have a loan on. For example, you may still have a few more years until the commercial mortgage loan you received to purchase your hotel is paid off. However, you would like to use the hotel as collateral for a second location. You may have the ability to do this, but you need to look at your initial loan contract. Some lenders will make a point of forbidding this activity as a violation of the existing contract to prevent you from over-mortgaging the property and defaulting on your loan.

Basic Credit Requirements

Even when you use an asset to get a loan, you will be subject to basic credit requirements from your lender. You will have to prove that you have managed your previous loans responsibly. This means having a good credit score as well as having some installment loans in the past. If you do not meet these basic requirements, you may be considered a high risk borrower. Asset-based loans are still a great option for high risk borrowers. However, you may need to approach specific high risk lenders if you cannot secure the loan through a traditional lending source.