What is an Asset Conversion Loan?

An asset conversion loan is one form of short-term business loan. The company applying for the financing receives immediate cash in order to meet pressing financial needs. Then, the company converts and asset into cash to repay the loan.

Example

For example, a trucking company needs $20,000 to pay for damage to a facility. It has a fleet of trucks, each worth tens of thousands of dollars, but it does not have any immediate liquidity. The company takes a $20,000 asset conversion loan and advertises a truck for sale at the same time. The lender holds that truck as collateral. When the truck sells, the business immediately repays the loan. If the truck does not sell, the lender claims it in the case of default.

Alternatives

Alternatively, a business owner could elect to secure an equity loan using the truck as collateral. In this case, the truck would never be sold. Instead, the business owner would hold the financing for a longer period of time and repay the lender slowly. The asset would never be converted, but the business owner may pay more to finance the loan because of higher interest rates over the length of the longer loan. 

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