What is an asset-conversion loan?
An asset-conversion loan is a type of short-term loan secured by collateral. Typically used in business, the asset-conversion loan liquidates itself as the business converts its collateral into cash. Asset-conversion loans are frequently used when a business expects a temporary build-up of inventory and requires a quick cash inflow.
Deeper definition
An asset-conversion loan is issued to a company that needs an immediate infusion of cash to meet its current financial obligations. The collateral put up to pay back the loan is usually inventory, accounts receivable, or other assets directly related to the business’s day-to-day operations. Revenue from the sale or consumption of the asset pays for the asset-conversion loan.
Asset-conversion loans are very popular around holidays, when businesses expect a larger-than-usual amount of inventory over a shorter period of time. Asset-conversion loans are usually paid off quickly as operations pick up speed, but they may be risky for the lender if the business doesn’t meet its sales expectations.
For some, the use of a personal loan could help to meet financial needs as well. Use our loan calculator to find one that fits your needs.
Asset-conversion loan example
Ellen takes out an asset-conversion loan for her landscaping business. In the spring months, she must borrow funds to purchase equipment, and does so with this type of short-term loan. She bases her repayments of the loan on the income she will receive over the following weeks and months as her clients begin to obtain her services. Over that time, she repays the debt in full.
