02/03/14

What is an Asset-Based Small Business Loan?

There are many different types of asset-based small business loans. An equipment loan can be considered an asset-based loan, but so can a loan based upon using personal luxury items as collateral (consider it business pawn).

In some cases, it helps to be specific when looking for a small business loan. When purchasing equipment that is required to do business, there are many small business owners who will find success with a lender who specializes in equipment loans that might not find success with a traditional term loan. The lender uses the new equipment as collateral, thus minimizing the risks associated with the loan.

When I think of an equipment loan, I automatically start thinking about heavy construction equipment or machinery, but equipment loans aren’t restricted to that. If you’re a restaurant and need a pizza oven, that is considered equipment; as would computers and software—if they are required to do business. Any tangible asset that is essential to the operation of business—and even some that might not be essential could qualify. There are some lenders that will even fund an equipment loan using equipment that you already own as collateral.

In addition to equipment loans, equipment leasing could be another option for purchasing the equipment you need to do business. The Equipment Leasing Association of America claims that about 80 percent of U.S. companies lease some or all of the equipment they use. Of course there are advantages and disadvantages to a lease, but depending upon your circumstances, a lease could be a good fit for your business. Just make sure you have a good handle on the following:

Personal asset loans are another source of capital that has recently found some popularity. As credit tightened after 2008, a number of personal asset lenders started offering business pawn-type loans to small business owners. These lenders are usually online and will take personal luxury assets like gold and diamond jewelry, luxury watches, and classic cars as collateral for a short-term business loan.

If you need emergency cash tomorrow, a personal asset loan might be an option. These are definitely short-term loans that fit within a very narrow criteria. The transactions are often completed within 24 hours—so they are quick, they require no credit check—your asset secures your loan, and there is no personal guarantee. If you default on the loan, you’ll lose your Rolex or whatever else you used as collateral.

If you go down this road, do so with your eyes wide open. Like a pawnbroker, they’ll keep your luxury item as security. The interest rates are really very high for all but an emergency, and you’ll want to make sure you’re using a reputable lender (get a reference if you can).

Other than being based upon an asset, there isn’t much similarity between an equipment loan or lease and a personal asset loan. Equipment loans have been around for many years, while personal asset-based small business loans are something relatively new. I would consider the former a very attractive way to purchase equipment while the latter, more of a financing means of last resort. That said, there are small business owners who have successfully leveraged personal assets to fill a sort-term need for cash.

Simply remember, sometimes when looking for a small business loan it pays to be specific.

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About the author

Ty Kiisel
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.

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