Asset Financing
What is Asset Financing?
Asset financing alludes to the utilization 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 give the lender a security interest in the assets.
Understanding Asset Financing
Asset financing contrasts impressively from traditional financing, as the borrowing company offers a portion of its assets to rapidly get a cash loan. A traditional financing arrangement, for example, a project based loan would include a more extended process including business planning, projections, etc. Asset financing is most frequently utilized when a borrower needs a short-term cash loan or working capital. Much of the time, the borrowing company utilizing asset financing vows its accounts receivable; nonetheless, the utilization of inventory assets in the borrowing system is entirely expected.
The Difference Between Asset Financing and Asset-Based Lending
At a fundamental level, asset financing and asset-based lending are terms that basically allude to exactly the same thing, with a slight difference. With asset-based lending, when an individual borrows money to buy a home or a vehicle, the house or the vehicle fills in as collateral for the loan.If the loan isn't then reimbursed in the predetermined time span, it falls into default, and the lender may then hold onto the vehicle or the house and sell it to pay off the amount of the loan. A similar concept applies to businesses buying assets. With asset financing, assuming different assets are utilized to assist the individual with meeting all requirements for the loan, they are generally not considered direct collateral on the amount of the loan.
Asset financing is regularly utilized by businesses, which will more often than not borrow against assets they as of now own. Accounts receivable, inventory, machinery and even structures and warehouses might be offered as collateral on a loan. These loans are quite often utilized for short-term funding needs, for example, cash to pay employee wages or to purchase the raw necessary materials to deliver the goods that are sold. So the company isn't purchasing another asset, however utilizing its owned assets to make up a working cash flow shortfall. If, in any case, the company proceeds to default, the lender can in any case hold onto assets and endeavor to sell them to recover the loan amount.
Secured and Unsecured Loans in Asset Financing
Asset financing, in the past, was generally viewed if all else fails type of financing; in any case, the disgrace around this source of funding has reduced after some time. This is essentially true for small companies, startups and different companies that lack the history or credit rating to fit the bill for alternative funding sources.
There are two fundamental types of loans that might be given. The most traditional type is a secured loan, wherein a company borrows, pledging an asset against the debt. The lender considers the value of the asset pledged as opposed to checking out at the creditworthiness of the company overall. On the off chance that the loan isn't reimbursed, the lender might hold onto the asset that was pledged against the debt. Unsecured loans don't include collateral explicitly; in any case, the lender might have a general claim on the company's assets in the event that repayment isn't made. On the off chance that the company fails, secured creditors regularly receive a greater extent of their claims. Thus, secured loans normally have a lower interest rate, making them more appealing to companies needing asset financing.
Features
- Asset financing is normally used to cover a short-term need for working capital.
- Asset financing permits a company to get a loan by pledging balance sheet assets.
- A few companies like to utilize asset financing in place of traditional financing as the financing is based on the actual assets as opposed to the bank's impression of the company's creditworthiness and future business possibilities.
