Assets in Business

Assets in business are items or resources that a company owns that have potential economic benefits, i.e., the company uses them to operate or generate value. This can include equipment, vehicle, inventory, or property that is exclusively or primarily used for the business. It can also include intangible items, such as intellectual property like patents or trademarks, which the business owns the rights to. 

Business assets can play a major role in business loans. In particular, they are typically required as collateral when a company tries to secure a traditional business loan involving a huge or significant amount. Lenders ask for collateral to mitigate risk. In other words, companies use their business assets as a pledge to secure the financing they seek.

In the event that the company is unable to fulfill its obligation to pay back its loan, the lender can seize these assets and sell them in order to recover their losses. These are asset based loans.

Using a collateral for a business loan can give the company some benefits, too, but at a high risk. A collateral-backed loan often comes with higher limits, lower interest rates, and longer repayment terms. However, there is that possibility of losing a valuable asset, one that the company actively uses to operate or generate business.

There are different types of assets that lenders accept as collateral. Here are some of the most common ones:

Cash & Other Liquid Assets

Cash on hand and money in a savings or checking account is the gold standard for banks offering business loans. Banks love cash as collateral because they don’t have to deal with liquidating or selling the asset. 

Because of this, companies often receive the most favorable terms when they use cash as a collateral. However, once they do so, this money is tied to the loan and cannot be touched so it becomes unavailable for business use.

Meanwhile, a liquid asset is an asset that can be quickly converted into cash with little or no loss in value. These assets are often reported as current assets on the balance sheet and compose part of a company’s net worth. Current assets are short-term assets that are expected to be sold, consumed, or converted into cash within a year.

Liquid assets include:

• Marketable securities: These include stocks, exchange-traded funds (ETFs), and mutual funds held in a standard brokerage account. 
• Money market instruments: These are highly liquid, short-term debt securities which mature in a year or less. Examples include treasury bills (T-bills), certificates of deposit, and money market funds.

Inventory 

A business’ unsold stock can be used as collateral to secure working capital or a revolving line of credit. This type of financing is called asset-based loan or inventory financing, and it’s typically short-term.

However, unlike liquid assets, unsold goods don’t fetch a full or equivalent loan value. That is, lenders typically offer advances ranging from 50% to 85% of the inventory’s wholesale or liquidation value. 

If you’re thinking of securing inventory financing or asset-based loan, consider the advantages and disadvantages first:

Advantages	Disadvantages
Fewer asset requirements means easier access to funds	Higher costs, i.e., higher interest rates, due to the more volatile nature of inventory, e.g., potential spoilage or depreciation
Cash flow management becomes steady through the busy and slow seasons of the business	Liquidation risk, i.e., if the company defaults in its payments, the lender can seize the inventory to recover their funds
Favorable for growing businesses with a large volume of available stock or inventory on hand but lack an extensive credit history	Required physical audits or electronic tracking of inventory to ensure that the collateral maintains its value

Accounts Receivables

Accounts receivables (AR) are essentially unpaid invoices from the sale of a company’s goods or services. In other words, AR is the money owed by customers to a business. 

AR is considered a current asset because it contributes to a business’ liquidity because while still collectible, payment is expected to be received in due time. With this expected influx of cash, AR can cover short-term obligations without the need for additional cash flows.

Businesses that are strapped for cash but have plenty of accounts receivables can pledge them to get advance cash or to establish a line of credit. Lenders will typically give 70% to 80% of a company’s total eligible receivables to businesses, which they can use as working capital. The company repays this loan as their customers pay their bills.  

Equipment & Machinery

Equipment and machinery are any tangible asset, except real estate, which the business needs to conduct its operations smoothly. These include computer equipment, office furniture, company vehicles, and manufacturing tools. 

Because funding to upgrade, replace, or purchase new equipment or machinery can cost hundreds of thousands of dollars or more, businesses turn to lenders who offer equipment financing. These lenders provide access to funds that will be used to buy the machinery or equipment with the condition that this brand-new asset will become the collateral for the loan. 

Because of this, some lenders may be willing to provide 75% to 80% of the value of the machinery or equipment. However, they may require a sizable down payment for the loan. In terms of repayment, it can range from several months to 10 years or longer. If the business defaults, the lender has the right to take possession of the equipment or machinery. 

Commercial Real Estate

Similar to financing for equipment and machinery, commercial real estate can also be bought through a loan with the property itself serving as the collateral. Commercial real estate is a highly regarded collateral asset due to the fact that it holds value well and is difficult to move or hide. 

Lenders typically offer 75% to 90% of the asset’s appraised value. Thanks to this higher loan limit coupled with lower interest rates, commercial real estate provides businesses access to significant capital for its operations or expansion. If a business fails to repay the loan, the lender can legally seize and sell the property in order to recover their funds.