The biggest con of collateral loans is the risk of losing your assets if you hit a rough patch and fail to make your monthly payment. If you don’t repay the loan, you can bet that someone will come looking for whatever you used to collateralize the loan (equipment, real estate, etc.)
Another con is that lenders typically don’t loan the full value of an asset. Invoices are often financed for between 70% and 85% of their total value. If you are considering invoice financing, be aware that a lender might not be interested in financing some of your invoices. Many lenders are only willing to finance invoices issued to other businesses, not individuals.
Unlike unsecured loans or credit cards, the amount of financing you can receive from an asset-based loan is tied to the quality of your receivables. For example, if you’re interested in invoice financing, lenders will be concerned with the payment histories of your customers. If you are considering inventory financing or want to use real estate as collateral, the lender may want to make an onsite visit to evaluate the assets and see what condition they’re in. An onsite visit may involve a fee that you would be responsible for paying.