Asset-Conversion Loan

DEFINITION of 'Asset-Conversion Loan'

A short-term loan that is typically repaid by liquidating an asset, usually inventory or receivables. An asset-conversion loan is a type of self-liquidating loan and is repaid from operating cash flow; the repayment schedule is designed to match up with the receipt of the anticipated income. Asset-conversion loans are most commonly used by companies with highly seasonal businesses, such as those that earn most of their incomes around Christmas.

BREAKING DOWN 'Asset-Conversion Loan'

For example, let's say a toy company needs 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 trying to get an asset-conversion loan to fill that short-term cash void. Depending on its creditworthiness, the toy company may have other short-term borrowing options, such as a line of credit, as alternatives to an asset-conversion loan.

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