Introduction
Asset loans are kind of business financing which is secured through any asset of the business. In case of default or failed to pay the loan, that asset will be seized by the lender. However mostly asset loan is used for any kind of business financing. Mostly business owners apply for asset loan in order to arrange working capital for their business. Mostly asset loans are short term loans in which lender charge higher interest rates as compare to other business financing. Companies that fail to meet their needs of working capital from the conventional financing methods go for the asset loans.
Detail
What Kind of Asset Can Be Used in Asset Loan?
The types of asset which can be used in asset loans are fixed assets such as property, machinery and equipment and current assets such as inventory and accounts receivables. Besides that some typical assets such as copyrights, trademark and pharmacy script files can also be used in applying for asset loans.
Why Companies Need Asset Loans?
There can be various reasons of going for the asset loan option such as grabbing a quickly developing market, need money for acquiring any asset or avoid financial stress to the company. Sometimes companies need asset loans to improve the cash flows. Asset based loans are getting popular because of current financial crisis all over the world. Companies are facing financial hard times and it becomes hard for them to survive.
Features
Mechanism of Asset Loans:
Asset loan is actually a method used by the companies in which they use existing assets of the company as collateral to obtain new funds from any lending institution. In this situation business owns the asset only keep it with lending agency as security. If the borrower fails to meet the terms and conditions of the asset loan, the lender has the right to acquire that asset. Therefore it becomes very important for the borrower that he should pay all the payments in time as mentioned in the terms and conditions of the asset loan.
Comments
In asset based loans the situation becomes tougher for the borrower as it requires day to day monitoring of receivables. The lender has complete control over the receivables of the business in asset based loans. In conventional loan borrower needs maximum of 4:1 debt to equity ratio whereas in asset loans borrower need 10:1 equity ratio sometimes even higher than that. If we see the figures of asset based loans it shows that during last 4 to 5 years this type of business financing increased manifolds. As banks and financial institutions tightening their terms and conditions for the conventional type of business financing, the choices for the business borrowers narrow down. This gives increase in application of asset based loans. On the other hand lenders also feels much comfortable in approving asset based loan as compare to conventional business financing as this is a secured way of providing funds specially in the market where bankruptcies increased during the economical turmoil. The popularity of asset based financing is increased each day despite tough conditions and higher interest rates applied on this type of business financing.
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