Asset Financing: Definition, How It Works And Benefits 

Asset financing refers to the use of a company’s balance sheet assets, including short-term investments, inventory and accounts receivable, to borrow money or get a loan. The company borrowing the funds must provide the lender with a security interest in the assets.

Understanding Asset Financing
Asset financing differs considerably from traditional financing, as the borrowing company offers some of its assets to quickly get a cash loan. A traditional financing arrangement, such as a project based loan would involve a longer process including business planning, projections and so on. Asset financing is most often used when a borrower needs a short-term cash loan or working capital. In most cases, the borrowing company using asset financing pledges its accounts receivable; however, the use of inventory assets in the borrowing process is not uncommon.

Why Use Asset Financing?

  1. Securing the use of assets
    The capital expenditures for purchasing assets outright can put a strain on a company’s working capital and cash flow. Using asset financing provides a company with the assets they need to operate and grow while maintaining financial flexibility to allocate funds elsewhere.

Purchasing assets outright can be expensive, risky, and hold a company back from expansion. Asset financing provides a viable option to acquire the assets the business needs without excessive expenditures.

With asset financing, both the lenders (banks and financial institutions) and the borrowers (businesses) benefit from the structure. Asset financing is safer for lenders than lending a traditional loan.

A traditional loan requires the lending of a large sum of funds that a bank hopes they will get back. When the bank lends assets out, they know they will be able to at least recover the value of the asset’s worth. In addition, if borrowers fail to make payments, the assets can be seized by the lender.

  1. Securing a loan through assets
    Asset financing also involves a business looking to secure a loan by using the assets from their balance sheet pledged as collateral. Companies will use asset financing in place of traditional financing because the lending is determined by the value of the assets rather than the creditworthiness of a company.

If the company were to default on their loans, their assets would be seized. Assets pledged against such loans can include PP&E, inventory, accounts receivable, and short-term investments.

Early-stage and smaller companies often run into an issue with lenders because they lack the credit rating or track record to secure a traditional loan. Through asset financing, they can receive a loan based on the assets they need to secure financing for their day-to-day operations and growth.

It is commonly used for short-term funding needs to increase short-term cash and working capital. The funds will be put towards a number of items, such as employee wages, payments to suppliers, and other short-term needs.

The loans are typically easier and faster to obtain, which makes them attractive to all companies. With fewer covenants and restraints, they are more flexible to use. The loans are usually accompanied by a fixed interest rate, which helps the company with managing its budgets and cash flow.

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