What Is an Asset-Conversion Loan?

An asset-conversion loan is a short-term loan that is typically repaid by liquidating an asset, usually inventory or receivables. Asset-conversion loans are sometimes used by companies with highly seasonal businesses, such as those that earn most of their income around Christmas.

How an Asset-Conversion Loan Works

For example, a toy company may need to pay its employees in mid-November, but it is cash-poor because it has laid out most of its funds to produce and market toys that won’t be purchased until December. One option the toy company might explore is to get an asset-conversion loan. It could take the loan while simultaneously agreeing to put a delivery truck up for sale. When the truck sells, the loan is paid off. If it doesn’t sell, the toy company will be in default on the loan, but the lender will have the truck as collateral.

An Asset-Conversion Loan vs. a Term Loan

Depending on its creditworthiness, the toy company may have other borrowing options. It could take out a term loan, using the delivery truck as collateral, and pay the loan off over a longer period. That way it could keep the truck as long as it continued to make payments on the loan.

[Important: Asset-conversions loans are short-term loans useful for highly seasonable businesses and are obtained by liquidating an asset, usually inventory or receivables.]