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Asset conversion loans are an example of the type of short-term loans that are often made to businesses of various sizes. The expectation with an asset conversion loan is that the recipient of the loan will be utilizing the revenue received from the sale of an asset to repay the short-term loan. Often used as a simple way to deal with a temporary cash crunch, the typical asset conversion loan may provide anywhere from thirty days to six months for repayment of the loan. This is usually sufficient time for the borrower to sell an asset and secure the funds to pay off the loan.
One of the most common applications of an asset conversion loan is to meet a payroll when there is a temporary lull in the receipt of payments from customers. Using a portion of the inventory as the asset, a company can approach a financial institution about the extension of a short term loan, based on the premise that the company will sell off the asset and use the funds to pay off the loan. The asset must be determined to be of sufficient value to cover the entire cost of the loan, including any interest or fees that are applied. Generally, the asset is expected to be real estate or property that the company maintains in its physical inventory. In some cases, an outstanding receivable that is expected to be paid in full may be used as grounds for the asset conversion loan.
It is important to remember that the lender does not assume control of the asset that is expected to be converted in order to repay the loan. The recipient is still responsible for managing the asset until it is sold and the proceeds are used to pay off the asset conversion loan. This is a very different concept from the practice that is known as factoring loans. With a factoring loan, a company extends a loan to a company, but in return manages the collection of the Accounts Receivable of the company until the loan is paid off. The issuer of an asset conversion loan will not touch the asset, unless the loan comes due and the borrower has not been able to sell the asset or repay the loan.
An asset conversion loan is a great way for a company to handle a temporary cash crunch. However, this type of financial arrangement should not be seen as a way to deal with an impending financial crisis for the company. Unless there is a reasonable expectation of being able to sell the asset and repay the loan on time, other means of funding the company should be considered.