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The Pros and Cons of Collateral Based Loans

If you want to grow your business or need help covering daily expenses, using your assets is a great way to get the capital you need.

Collateral Based Loans Explained

This type of lending is referred to as collateral based loans or asset-based financing. A collateral based loan is when a financial institution allows you to borrow money based on your assets, which may include equipment, inventory, or accounts receivable. Depending on the loan, you may be required to secure the financing with one asset. However, some lenders may only allow you to borrow based on multiple assets combined.

When a loan is secured with assets, you are not selling your property to the lender. But, you are borrowing against your assets. This means that if you fail to make payments, the lender can seize them. Then, the lender can sell your assets to recover the money it lent to you.

What is Considered Collateral?

Anything that is legal, easy to value, and be resold for cash is considered collateral. Common types of collateral are:

  • Accounts Receivable
  • Antiques and collectibles
  • Equipment, machinery, and tools
  • Insurance polices
  • Investments
  • Real Estate
  • Savings
  • Vehicles

The Pros of Collateral Based Loans

Easier to Get Approved

Many merchants apply for collateral based loans because they were turned down by banks or other traditional lenders. In general, collateral based loans are easier to qualify for than more traditional loans. The major eligibility requirement is that you have valuable assets to secure the loan. Since the loan is not based on your credit score, poor credit isn’t a factor.

A Less-Restrictive Type of Funding

Many other types of funding restrict how you can use the money you borrow. Collateral based loans can be used for any project, as long as it relates to your business. Also, over time, if your assets increase in value, that can boost how much money you can borrow.

Get Capital Quicker

The process for a collateral based loan moves fairly quickly. Typically, if there are no issues, the loan can be completed within a few days. A traditional loan can take a couple months to process.

The Cons of Collateral Based Loans

Which Assets Qualify as Collateral is Up to the Lender

It’s true that, in general, anything that is highly valuable and has low or high depreciation rates and can easily be converted into cash. However, every lender has its own terms when it comes to classifying what constitutes a collateral.

More Expensive Than a Traditional Loan

Assessing collateral is a much more thorough process than what gets monitored in a traditional loan. Therefore, these assessments and loan administration it requires cause the overall costs to rise.

A Final Thought on Collateral Based Loans

Like with any type of borrowing, consider the risks and benefits to your business before you move ahead and apply for a collateral based loan. If you have been turned down by banks or if you have an emergency cash situation, this type of lending may be the perfect way for you to get your business back on track.

When it’s time for you to make a decision, consider First American Merchant (FAM). As a high-risk merchant expert, FAM works with businesses of all sizes and backgrounds to find the right business funding solutions. Its online application process is quick and simple.