Asset Conversion Loan - Explained
What is an Asset Conversion Loan?
Written by J. Mance Gordon
Updated at April 18th, 2022
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What is an Asset-Conversion Loan?
This is a short-term loan that is paid for by selling an identified asset (such as inventory). They are common with seasonal businesses that take out these loans to pay for inventory to be sold in a specific period, such as holiday apparel.
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How Does an Asset-Conversion Loan Work?
Take the example of a merchant selling fireworks near the 4th of July. Of course, she must purchase all of her inventory well in advance of this date to make certain she has adequate supply. She may not, however, have the funds to purchase enough inventory. She may take out an asset-conversion loan. She pays the loan back immediately upon sale of her inventory (after the 4th of July). The loan will generally be secured by the inventory with a specific provision requiring payment upon sale of said inventory or at a date relevant to sale of the inventory.