These Are The 5 Most Common Types Of Collateral Used For An Asset Based Loan

As long as the asset you are offering is financially or physically valuable and can be easily converted into cash, you can use it as collateral for a loan. A list for all assets that can be potentially used as collateral for an asset-based loan is going to be exhaustingly long when you consider that every business has its own share of valuable assets.

However saying that some assets are definitely favored over the others, and in this guide, we list some of the common asset classes that lender’s usually look out for:

1. Accounts Receivable

If you own a service based company and are in the process of issuing regular invoices to your customers, any/all receivables can be considered as eligible collateral for an asset-backed loan.

The amount you are eligible to loan is directly proportional to your outstanding receivables. This simply means that the number of invoices that you have issued and the greater the collective value of all your invoices, the bigger the amount you will be eligible to borrow.

It is important to point out that this is different from invoice factoring.

In the latter, the lender will purchase all your pending invoices outright for a fixed sum, and will then collect all your customer’s payments on your behalf. Once they collect the total amount receivables, they will pay you the balance difference amount but will pocket a fixed percentage for their services.

Therefore, in essence, invoice factoring is a sale, whereas accounts receivables is a loan in the traditional sense. Typically business owners use invoice factoring to deal with overdue past invoices or delinquents. Make sure that you find an alternative finance company suited to your needs.

2. Inventory

If you run retail, wholesale or manufacturing business, you are sure to have a lot of unused inventory at hand. This could help you deal with potential cash flow issues. These assets could technically still be sold at a later date, but right now they act as valuable assets in your company’s balance sheet, which can make you eligible for an asset-backed loan.

The value of your inventory will be appraised by the asset-based lender in order to calculate its resale value. This value can be considered as valuable collateral in exchange for an asset-based loan.

If you have taken out a loan, you are still free to do whatever you wish with regards to your inventory as long as you make timely loan repayments. But, if you default on your loan repayments, the lender has the legal right to seize control over your inventory to meet for the repayment of the loan amount.

3. Machinery and Equipment

You can use any machinery or equipment owned by your business as eligible collateral for an asset-based loan regardless of whether it includes vehicles, computer systems or manufacturing equipment. The higher the valuation of your equipment, the greater the amount you will be eligible to borrow. The most important thing is that you own the piece of equipment you are offering as collateral and are not just leasing it.

4. Real Estate

Any real estate owned by your business can be considered as fixed asset collateral for an asset-backed loan. Such situations can often be tricky to deal with and therefore is usually evaluated on the basis of the specifics of each case.

If you are considering using the property as collateral for an asset-based loan, it is important to carry out an independent appraisal beforehand. This will help you determine the current value of your property along with any expected appreciations in the future.

If you are still making mortgage repayments towards that property, you will have had to pay off a significant portion of your property in order for it to be considered as suitable collateral. Often lenders only consider your equity in the property (the percentage you own outright), while determining the loan amount. The mortgaged portion of that property is inadmissible as collateral as the mortgage provider holds the rights to that value in the event of default.

5. Other Tangible Assets

It is important to note that while this is no way an exhaustive guide of all asset-based loans collateral types, we have still tried to cover some of the more significant asset classes. There might be other monetizable assets that can be used as collateral for a loan, and this varies from one business to another. For example, even cheese was considered as suitable collateral for a small business loan by Credito Italiano, which is an Italian bank.

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