What Types of Companies would Benefit from a Asset-Based Loans?

Asset-based loans use collateral to secure financing. Asset-based business lending may require either personal or business assets depending on the phase of financing. Asset based loans are typically cheaper than unsecured loans because the borrower is assuming a portion of the risk. If the borrower defaults, the lender can seize the asset placed as collateral to recover the loss. If you have assets you can place as collateral and a strong financial backing to ensure against default, you will save money by securing the loan this way. 

Companies in the Start up Phase

Securing financing to start a new business can be very challenging, especially if your new business is considered risky. Risky businesses include Internet companies, retail stores and restaurants. Traditional businesses, such as medical practices and legal firms, are considered less risky. Regardless, a new business owner will likely need to secure a loan against personal collateral to achieve business financing in the beginning. Once the business is standing on its own, business assets can be used to secure financing. Personal collateral may be a home, vehicle or other business owned. Once the business is started, though, an owner should stop collateralizing personal assets in order to minimize exposure if the company goes bankrupt.

Companies with Natural Reserves

Oil, gold and mining companies with extensive natural reserves make excellent candidates for asset backed lending. These reserves can often be proven through geological surveys, and the assets may be in the millions of dollars. Since it costs so much money to get the machinery to remove the reserves from the ground, high levels of financing will be required. However, these assets are highly liquid; meaning even traditional lenders like banks will encourage borrowing against the reserves. 

Companies who Own Property

Real estate is one of the most common forms of commercial loan collateral. Real estate development companies incur high costs to develop new properties, especially commercial or multi-family residential properties. To provide for this financing, it is typically doable to monetize the assets a company already holds in real estate. When real estate markets are depressed, however, this financing option becomes challenging. The valuation of existing real estate holdings may come in well under what the company needs to expand. 

Companies with Heavy Machinery

Factories and construction companies have a lot of equity tied up in large machinery and equipment. In order to purchase new machinery, they must spend a lot of money. Taking advantage of the equity stored up in this existing equipment can be the easiest route to expansion for a lot of companies. It is easy to think of the machinery as a fixed-cost that is lost once the machine is purchased. Putting the money to work a second time will allow a business to expand and begin producing in greater amounts. Without tapping into that equity, it will be hard to locate the large amount of financing needed to expand a company that has such high fixed costs.