Asset-based financing should be entered into with extreme forethought, as the dangers, although small, can weigh heavy on a company that is already struggling financially. The most obvious disadvantage of asset-based loans is the fact that the interest rate is slightly higher than most traditional loans. For a company that needs cash fast, however, this is a small pill to swallow.
The most damaging disadvantage to asset-based financing is the fact that the financing is based on a company’s current assets, and gives no consideration to what might negatively happen to the company in the future. For example, a company whose assets are worth $1000 today will still be repaying the same loan amount in 3 years even if their assets are only worth $600. This can cause a tight squeeze, increasing costs and cutting into already reduced profits.
Carefully weighing the pros and cons of asset-based loans in both the short and long term for a business is the only way to determine if it is the right method to use for getting cash fast. For a company with a strong asset base and slow credit history, it can be the boost needed to get the finances on track.
What is Invoice Factoring?
Invoice factoring companies provide businesses in need of instant capital with the funds necessary for them to operate. Invoice factoring is not a loan from the factoring company. Instead, the factoring company purchases the invoices owed or accounts receivables from the business. These invoices are then sold to the factoring company who then instantly fronts a percentage of the money owed. The invoices and account receivables are sent by and paid directly to the factoring company, which then sends the company the remaining amount due, less a small fee for the transaction.
Most businesses opt for invoice factoring, as opposed to a business loan because the funds provided through invoice factoring are easier to obtain. And since invoice factoring companies base their decision to provide funds on the credit worthiness of the company’s clients, as opposed to the company itself, no debt is added to the company – more info at this website.
In most cases, asset based mortgage loans cannot be taken out for the full amount that you will need to purchase the property. Most asset-based mortgages can only be taken out for fifty percent of the property’s total value or less, though some lenders allow the loan to be for up to sixty-five percent or higher. This is because of the high value of homes and similar property, as well as the fact that those with little credit or who have had bad credit in the past are more likely to default on their loan payments than individuals who have established good credit.
Many asset-based mortgages are used in the purchase of homes and property that are going to be resold after restoration or that are being purchased at a discounted rate; the borrower in these cases is hoping to finalize the sale of the property before the loan is due in full. Though this can be risky since not all homes sell quickly, when it works it allows them to repay the loan easily while still making a sizeable profit off of the property in question.