You have two options for acquiring a business loan as a business owner. One of the options allows you to acquire a loan based on your business’s cash flow, called the cash flow-based loan.
The other option you can get is a loan based on your business’ assets, called the asset-based loan. Having two different loan options will decide which to avail of harder. That’s why you must first understand each loan to know which option is best for you.
What Is an Asset-Based Loan?
An asset-based loan is when you borrow money for your business against the current assets on your balance sheet. This type of business loan is an unsecured loan meaning that when you choose this type of loan, you can choose different types of assets as collateral.
For example, if you decide to apply for an asset-based loan, you can offer your inventory as collateral for the loan. You also have the option to use any equipment you have or your accounts receivable to act as collateral for the loan.
If you own real estate, lenders also accept this as collateral for an asset-based loan. These assets are the most commonly used as collateral by many business owners who acquired an asset-based loan.
An asset-based loan can be used by large to small companies. However, medium to smaller organizations can better benefit from this loan opinion. If your business falls in a medium to small-scale business category, the asset-based loan could be your better choice.
Additionally, you might want to opt for an asset-based loan if you have a bad credit score. This loan is suitable for borrowers with a bad credit rating and is considered a bad credit loan since you will put up assets as your collateral.
But before you decide, you must first understand what a bad credit loan is. Understanding Bad Credit Loans will help you know if getting a loan is a good idea given your current credit rating. Plus, you can also understand the benefits and risks a bad credit loan offers.
Asset-Based Loan Advantages
Now that you understand an asset-based loan, we’ll discuss its pros and cons next. First, let’s review the advantages of asset-based loans for your business.
- An asset-based loan allows bad credit borrowers to acquire additional funding for the business without any hassle.
- Quick approval and funding for your business.
- Offer more competitive terms
- Less strict restrictions
- Flexible repayment schedules and covenant structures
- Quick closing process
Asset-Based Loan Disadvantages
After understanding the benefits that an asset-based loan can offer you, it’s also ideal that you understand its disadvantages. Below are possible disadvantages that you can expect with an asset-based loan.
- You risk losing the assets you offer as collateral when you default.
- Your assets might be valued lower than their actual market value.
- Asset-based loans are more expensive than traditional loans.
What Is a Cash-Flow-Based Loan?
The next business loan option available for you is the cash-flow-based loan. This type of business loan is unsecured and commonly used by businesses for daily operations. In short, the cash-flow-based loan is used to finance a business’ working capital, such as rent, payroll payments, inventory, and the like.
This type of business loan will be repaid using a business’s cash flow. Thus the name suggests. It means that you’ll be borrowing money from your future income. This type of loan isn’t a traditional loan, so expect to undergo a thorough analysis of your financial health when you apply for one.
It could mean that the lender will look into your credit history and conduct a hard inquiry that can affect your credit score. That’s why the cash-flow-based loan is only suitable for businesses with good credit scores.
Commonly, the cash-flow-based loan is acquired by small businesses that don’t have an asset to offer as collateral and has a good credit record.
Cash-Flow-Based Loan Advantages
Similar to an asset-based loan, the cash-flow-based loan also offers amazing benefits to you and your business, such as:
- Has a larger funding amount
- Offers longer and more flexible terms
- Acquire money with little to no collateral
- Offers scalability as your business grow
- Acquire funding faster
Cash-Flow-Based Loan Disadvantages
Before you jump to the conclusion that a cash-flow-based loan is the right loan option for your business, you must go through the disadvantages of this loan first, which are:
- Cash-flow-based loans often have higher fees.
- Since you’ll not be asked for an asset as collateral, the lender could place a general lien on your business. This lien will be a part of your loan agreement with the lender.
- Some lenders may require automatic payments.
Conclusion
Both asset-based and cash-flow-based loans have their respective pros and cons that could affect your business. That’s why choosing which one is right for you will depend on your financial health.
If you have a bad credit score, asset-based lending would be beneficial for you. Meanwhile, if you have a good credit record, you might want to opt for a cash-flow-based loan.
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