As the name applies, an asset-based loan is one that is secured by an asset. This type of funding differs from a merchant cash advance (MCA) and determining which one is right for you can be complicated. At ReconcileMyMCA.com, we represent businesses around the country that are struggling to meet their financial obligations. Whether you are considering an asset-based loan or at risk of defaulting on an MCA, our experienced merchant cash advance lawyers can help. Contact us today by completing the convenient intake form.
How Does an Asset-Based Loan Work?
In asset-based lending, the loan is secured by the borrower’s assets, such as accounts receivable, inventory, equipment, and property. Because the loan is secured by an asset, less risk is involved for the lender compared to unsecured funding products like a merchant cash advance. This results in a lower interest rate for the borrower, depending on the liquidity of the asset.
For example, an asset-based loan secured by accounts receivable is considered less risky than a loan secured by a property. Accounts receivable can be sold more readily than property, which means the borrower would consider lending at a much lower rate.
Asset-Based Loan Amounts
If you own a home with a mortgage on it, you are probably familiar with the term “loan-to-value” ratio (LTV), which is also used to determine loan amounts in asset-based lending.
The loan-to-value ratio depends on the type of asset: the more liquid the asset, the higher the LTV. For example, a lender may quote an LTV of 50 percent of inventory. This means the lender will only offer a loan of up to 50 percent of the value of the inventory. LTV ratio is calculated as follows:
Loan-to-Value Ratio = Loan Amount/Asset Value
The loan amount is the amount that the lender intends to loan, and the asset value is the value of the asset being used as collateral. The LTV for receivables is typically about 70 percent, while the LTV for inventory is usually no higher than 50 percent, and the LTV for other assets is obviously lower.
What Are the Advantages of an Asset-Based Loan?
Asset-based lending offers several benefits to the borrower. Asset-based loans are easier to obtain than lines of credit and other alternative funding products, come with lower interest rates, and generally contain fewer covenants. But there are disadvantages as well, the main one being that the lender can seize the borrower’s pledged assets and liquidate them to settle the amount outstanding.
Asset-Based Loans v. Merchant Cash Advances
There are significant differences between an asset-based loan and a merchant cash advance. The primary difference is that an MCA is not a loan. Instead, a merchant cash advance is a purchase and sale of future receivables – credit card and debit card sales – in exchange for a lump-sum cash payment upfront. Because an MCA is not a loan, this type of alternative funding is not governed by state usury laws.
Also, to obtain an asset-based loan, the business owner must meet certain credit criteria. By contrast, MCA providers focus less on credit ratings and look to the business’s sales history to determine whether to make the cash advance.
Finally, merchant cash advances are typically pitched as “no collateral required,” but this is not so. This type of alternative funding typically requires the business taking the advance to sign a Confession of Judgment (COJ) in which they accept liability for the loan and waive any defenses in the event of default.
The funder then has the right to automatically file a judgment in court to seize the business assets. Ultimately, defaulting on an asset-based loan or an MCA puts the business assets at risk, making these funding products similar.
Why You Need a Merchant Cash Advance Lawyer
If you are at risk of defaulting on a merchant cash advance, you have options. First, an MCA agreement typically includes a reconciliation clause that requires the funder to restructure the payment plan if you experience a receivables shortfall. You must notify the MCA provider of the shortfall, however, and have a plan for returning to profitability. This is where an experienced merchant cash advance lawyer can help.
At ReconcileMyMCA.com, we are highly experienced in negotiating the terms of merchant cash advances for struggling business owners. We can help you determine whether reconciling your cash advance is the best option for you and consider alternatives (e.g. a debt consolidation loan) that may better suit your needs. You must act quickly, however, because your business assets are at risk. Also, you may have already signed a personal guarantee aside from the MCA agreement whereby you pledged your personal assets (e.g. house, car, bank accounts) if you cannot pay back the merchant cash advance.
Our team of debt relief specialists and merchant cash advance lawyers are here to help. The sooner you contact our office, the sooner we can get to work reconciling your merchant cash advance. Fill out the convenient intake form now.