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What's an asset-based loan?

Imagine you want to buy a bigger factory to build your widgets in. You don't have enough money to buy the factory, but you have an order to produce 1,000,000 widgets, and your accounts receivable data reflects the future income that will come from the sale of those widgets. With this information, you might be able to get a lender to secure an "asset-based loan."

An asset-based loan uses your future earning capacity as collateral for your loan. As a business, you will secure an asset-based loan through a combination of your inventory and accounts receivable information. Depending on the negotiated terms of your loan, the asset-based lender may loan you a percentage of your secured assets. For example, the lender might offer an advance of between 70 and 80 percent of your accounts receivable and 50 percent of your completed inventory.

The smaller the loan, the harder it will be to get. Banks usually make more money from big loans with the same amount of work, so they frequently look for businesses that qualify for bigger loans. However, smaller companies can often qualify for the small asset-based loans they require if they're willing to put in the legwork to find a lender who will approve them.

It helps to understand the laws surrounding asset-based loans for real estate transactions before you agree to the terms of a loan. By knowing the law -- and by understanding how asset-based loans are usually organized -- you'll have a better chance of evaluating whether the loan is fair, and ultimately, whether you should agree to the deal.

Source: Entrepreneur, "The Ins and Outs of Asset-Based Loans," accessed Dec. 15, 2017

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