How can I secure my assets against business funding?

Asset Based Lending or ABL is that type of business lending that is secured by an asset such as a property owned by the individual borrower. Under this type of lending, the borrower may forfeit all or part of an asset when he fails to repay the business loan. A mortgage loan, for instance, is an example of the ABL in which the borrower’s home is the main asset for which the borrower takes a loan against. There are some steps or ways through which you can secure your assets against a business loan, these include the following;

Consider the Risks Against the Options

Just before you settle for ABL, you need to fully understand what is at stake if you want to protect your assets against the loan. The main risk is that the failure to repay the loan means you stand the risk of losing your asset which could be your home, car, valuable jewelry or any other tangible asset that stands as collateral against the loan.

For this reason, you should use a property that only you alone hold the right to. You don’t have to lose your precious home to a business loan when there are less-risky loan options that wouldn’t involve your assets.

Combine Other Loan Options with ABL

Sometimes, the best possible way to secure your assets against business funding is to combine ABL with other loan options. For instance, you can obtain a personal loan or add your savings or money borrowed from friends and family to the ABL to fund your business. If for instance you take an ABL against 50% of the value of your home and get the remaining half from other sources, then the risk of losing your home is much lower. Perhaps you will be able to repay the Asset Based Loan quicker than the usual duration.

Combining other types of business loans with ABL with not only reduce the risk of losing your property, but it may also further reduce the interest payable as well as the total repayment duration for the ABL. There are several in-secured loans you can consider and combine with a secured loan like ABL, but remember that you should repay such unsecured loans just the way you need to repay the asset-based loan.

Consider Choosing Longer-term Asset Based Loan with Lower Fixed Rate

When choosing an Asset Based Loan for the funding of your business, you should rather consider the more flexible longer-term loans as against the short-term loans. The reason for this is that most Long-term asset-based loans do come with lower interest rates because of the extension of the repayment terms. With longer repayment duration, you wouldn’t be under any serious pressure on repayment and if you operate a viable business with constant profit generation, then you should be able to meet up with payment and protect your property from being seized.

In the UK an asset-based loan with interest rate lower than 8% is considered a low-interest loan, and fortunately, you can find such loans in some banks.

Consider Borrowing Asset Based Loans in Smaller Bits

If you don’t want to borrow a long-term asset-based loan, then you should consider borrowing in bits, as you need the funding. The issue with borrowing smaller capital at a time is that the repayment terms are shorter but the benefit is that when you borrow what you need at a particular time and there is a guarantee of prompt repayment, then you will be able to secure your assets effectively.

Most short-term asset-based loans do come with fixed interest rates and that could be a huge plus also. It is easier to repay smaller loans especially when profitability is sustained throughout loan repayment. Taking an ABL when exactly you need it is very important, it helps you avoid borrowing more than you need at a particular time, especially when you need to expand your business.

Pay Off All Existing Loans Before Taking Asset Based Loan 

If you have existing credit card loans or any other type of loan for that matter, you need to make efforts to repay them before taking a new ABL. Banks and some other Equity Lenders may not approve an asset-based loan if you have numerous existing loans on your credit card. Taking a new loan on your credit card may also reduce your credit score further. If you can’t repay all existing loans before taking an ABL, then you have a sustainable means of servicing such loans, in addition to the new asset-based loan. Paying you existing loans before applying for an asset-based loan can actually boost your credit score, making it easier to secure loans from traditional banks and Equity lenders.

Conclusion

It is important to compare your offers, to explore new options of securing your assets against ABL. Once the potential lenders are done reviewing your applications, you will receive positive feedback from those interested but you must avoid jumping into any offer that seems to be too good to be real. Take some time to review all offers to achieve a positive result.

You need to pay attention to the loan-to-value ratio of each offer from the lenders, any value to the ratio that is higher than 75% of your asset value should raise a red flag. Perhaps you should consider the length of loan repayment and the interest rate before making the final decision. If the loan to value ratio is 75% or higher but the interest rate is lower while repayment period has been extended, then it is much safer to opt for such loan as long as you have means of repaying such loans for the extended period.

Don’t hesitate to consult a financial loan advisor on this issue, you don’t want to get stuck to a loan you wouldn’t be able to repay, especially if your business profit is not guaranteed. ABL is most useful when the long-term objective of the loan is to increase productivity and return on investment.

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