If you’re looking to increase your business’s working capital – perhaps to hire new staff, purchase new inventory or equipment, expand into a new location, advertise your offerings, and so on – then you may have come across “asset based loans”.
Below, we simply describe what this is, and then highlight some reasons why it may be the wrong working capital solution for your business.
What Are Asset Based Loans?
Asset based loans are unlike conventional (bank) loans, because they’re not based on your business’s past performance or future financial projections. Rather, they’re a revolving line of credit based on an evaluation of your business’s current assets, which are used as collateral. These assets can include your inventory, equipment, commercial real estate (including owner-occupied), and accounts receivables.
Typically, asset based loans are based on 75 to 90 percent of an asset’s value. For example, a piece of industrial equipment valued at $30,000 may result in an asset based loan offer of $22,500 (75 percent).
Disadvantages of Asset Based Loans
There are some significant disadvantages associated with asset based loans, and it’s vital that you’re aware of all of them before you submit an application and “sign on the dotted line”. Below, we highlight 3 major drawbacks to consider:
1. You may not get a fair valuation for your assets.
You may know without any doubt that your industrial equipment is worth $30,000. What’s more, you may be able to line up a dozen experts who will attest to this amount. However, a potential lender may — and probably will — see things differently, and valuate the asset below what you think (and frankly, know) is fair and appropriate.
2. You’ll lose your assets if you default.
While it’s hopefully just an academic discussion, it’s possible that you may find yourself in a situation down the road where servicing your loan because temporarily impossible. For example, one of your biggest customers may suddenly and go gone “belly up”, or you may lose a key employee to the competition – and be unable to win a lucrative project as a result.
However, these factors will not be taken into consideration by your lender, who will seize and liquidate your assets in the event of a default. Once this process is complete, your lender will keep the principal, interest, and all other fees – including administrative costs – and you’ll get whatever is left over, which may not be anything at all. In fact, you’ll likely still be on the hook for tens of thousands of dollars, even after the asset is seized and sold.
3. Repayment is often done via a lockbox.
You may be required to pay back your asset based loan by making a payment each month to your bank, which then deposits it into your lender’s account. This is called a “lockbox”. As you can imagine, this process can be an administrative hassle. What’s more, you may overlook this task as you deal with other issues and priorities in your business.
A Better Solution: A Business Line of Credit
If you’re considering an asset based loan, then we invite you to explore what we – and our customers across the country – believe is a much better solution to increase your working capital: a Mulligan Funding business line of credit.
Unlike asset based loans, our business lines of credit do not require collateral, and as such there is no possibility that your assets will be under-valued, or that they’ll be seized and sold in the event of a default. Furthermore, your loan is paid back automatically vs. having to pay your bank, which is one less task to do – or forget to do.
Plus, you do not need to pay down your business line of credit to 50 percent or more before accessing more working capital. At any time, you can access up to 100 percent of your pre-approved amount. You can also request a credit limit increase, which upon approval can be facilitated in a matter of hours.
Call Mulligan Funding at 855-326-3564 to discuss your financing options today!