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What is an Asset-Based Loan?

An asset-based loan or asset utilization loan uses assets as income. Whether you are a retiree with a small fixed income, a new business or an established company that needs to maintain a high cash flow, the ease and benefits of asset-based loans and mortgages have made them a popular solution for borrowers in recent years. With an asset-based loan agreement, also known as an asset depletion loan, borrowers are granted a loan based on their assets. An asset-based loan or mortgage allows you to utilize the assets you have already invested in to secure the cash you need now.

Asset utilization loans are perfect for retirees, investors, and/or self-employed borrowers that have assets on-hand.

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Pros

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  • Secured by Collateral: Asset-Based Loans are easier to obtain as they are secured by collateral.

 

  • Flexibility: These loans offer more flexibility in terms of repayment schedules and interest rates.

 

  • Multiple Uses: They can be used for a variety of purposes, including working capital, inventory financing, and equipment purchases.

 

  • Relaxed Qualifications: Asset-Based Loans can be a good option for businesses with poor credit or limited operating history.

Cons

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  • Higher Rates: These loans often come with higher interest rates than traditional loans, which can make them more expensive in the long run.

 

  • Collateral Required: Asset-Based Loans require collateral, which means that borrowers risk losing their assets if they are unable to repay the loan.

 

  • More Restrictive Terms: They may have more restrictive terms and conditions than other types of loans, which can limit a borrower's flexibility and ability to manage their finances.

Example

Borrower: Mary, a real estate investor
Loan Purpose: Mary wants to purchase an additional investment property to expand her real estate portfolio.
Collateral:

  • Primary Residence - Valued at $500,000

  • Two Rental Properties - Valued at $300,000 each

  • Savings and Investments - $200,000 in liquid assets

Loan Details:

  • Loan Amount - $400,000

  • Loan-to-Value - 50% of the combined value of assets

  • Loan Term - 5 years

  • Interest Rate - 7.25%

Asset Valuation:

  • The lender assesses the value of Mary's primary residence and rental properties through professional appraisals

  • The liquid assets in savings and investments are verified through financial statements

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In this scenario, Mary secures an asset-based loan by leveraging the combined value of her primary residence, rental properties, and liquid assets. The lender considers the strength of Mary's collateral, and the loan is approved based on the assessed value of her assets. This type of loan is common for real estate investors and individuals with substantial assets who may not qualify for traditional loans based on income alone.

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