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What do you need to take out an asset-based loan?

There are different loans available to business owners who want to buy or expand their commercial properties. Sometimes getting a traditional loan proves difficult. If so, an asset-based loan or line of credit could be the answer.

According to the U.S. Small Business Administration, you receive asset-based financing by backing it with collateral. While you could lose the collateral if you fail to pay back what you owe, this kind of financing may benefit you if you have a strong business and sufficient assets to leverage.

Assets eligible for collateral

Asset-based lending uses business assets as collateral. To qualify as backing for a loan or credit, your assets should have the following characteristics:

  • Possess high value
  • Can convert to cash without difficulty
  • Highly appreciate
  • Have low depreciation

Qualifying assets generally consist of physical property such as equipment, vehicles or inventory. Business owners can also make use of their accounts receivable by offering them as collateral, depending on their value. Other assets on your balance sheet could qualify.

Number of needed assets

The amount of business assets you will need to put up depends on the kind of loan or line of credit you want. It is possible you will only need a single piece of property to qualify. However, for some loans, you will have to combine several assets to add up enough value to win approval.

Keep potential risks in mind

The flexibility of using asset-based financing to cover just about any business activity plus the ease of securing approval has made it an attractive option for many business owners. Still, you could potentially lose valuable property if you cannot repay the loan. Be sure that your business is solvent enough that meeting your payments is not a problem.