Meaning
As the name itself suggests, these loans are asset based i.e the loans under this category are secured by assets. These assets can be tangible and intangible as well. This process is known as “Commercial-financing” or “Asset based financing”.
Uses of Asset Based Loans
These are used by mid-sized and large companies as well. Below are listed the uses of asset based loans:
- These are used by the companies for financing their working capital.
- These are also used for capital acquisitions.
- Asset based loans are also used by the companies, which are facing a depreciating period. They use the revenue obtained,for formulating the reconstructing plans and thus to reposition the company.
Pitfalls
- Although companies go for these loans and mostly companies with a seasonal business are dependent on these loans, but one must know the pitfalls before signing the collateral. The fact is that , the lenders search for those customers who can pay the credit in less than 60 days or less, that means that one should have good credit rating. So small businesses either need to sign a conditional collateral or they need to pay in quite a short period of time.
- They also charge a greater interest than traditional loans. Sometimes it may even happen that , the banks may apply some fee or extra audit on these loans to cover the overall cost.
Although, these loans have a few loopholes but they remain to be the primary choice for the medium-sized companies as they are able to work and pay back in the required time period.
Recommended Read :
- What is a Bank Loan?
- Who is a Guarantor?
- What are Combined Loans?
- What is Usufructuary Mortgage How Does This Differ From Other Mortgages?
- Reverse Mortgage in India a Boon for Senior Citizen
- Interest Free Loan
- What is Credit Appraisal?
- What is Prepayment Penalty?
- What is Collateral Loan?
- What is Down Payment?
- Education Loan in India
- What is Balloon Payment?
Is it not similar to mortgage types? The only difference is that it is used by financial institution for a short period of time. The rate of interest is even high. But then even it is popular with mid sized companies for financing the working capital for a short tenure.