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Firms that follow any policy other than a flexible financing plan will find themselves forced to...

Firms that follow any policy other than a flexible financing plan will find themselves forced to seek short-term financing at times. Depending on their industry, they may find themselves using unsecured loans, secured loans, or other sources of short-term financing (such as commercial paper or banker's acceptances). If asset-backed loans are cheaper than unsecured loans, what is/are the disadvantage(s) to the firm in using an asset-backed loan?

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Answer #1

The disadvantages of using ASSET BASED LOANS even if they are cheaper than unsecured loans are as follows:-

  1. It creates a charge against asset .This implies that when an asset is kept as an collateral then there are restrictions by law on using them
  2. It creates a fear of forfeiture of asset . This implies that when an asset based loan is taken by an enterprise then there is an option of confiscation of the particular asset by the loaner on default of payment

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