Asset-based financing is a loan that uses the business' assets as collateral, such as equipment, inventory, or accounts receivable. The lender provides funding to the borrower and recoups its money by repossessing assets if not repaid in time. If you're looking for a way to grow your business, asset-based financing might be for you! Find out more about how asset-based financing works in this blog post!
What is asset-based financing
Asset-based financing is one strategy of using business ownership and assets to get funding. The company will use the assets it already has as collateral to borrow money.
For this reason, it won't need equity or other outside sources of capital. Assets can include patents, lease equipment, a large customer base, or perhaps just a rich shareholding family for whom you do a favor and now they are willing to help you out with getting finance in return.
The power of asset-based financing basically means that an asset exists when machinery, patents and/or property owned by the borrower is used to support credit risks coming from borrowing. Issues faced today such as unemployment may not be taken into account in determining whether borrowers are able to repay their loans.
How does it work for growing businesses
Asset-based financing, like equipment leasing, is one way businesses can meet their financial needs without diluting their ownership. Some other ways to finance growth through owning fewer assets are using a line of credit or getting a small business loan with easy terms.
Purchasing new equipment, computers, machine tools, and software are all examples of investments that help your business grow. But when you need to invest in large items like this but don't have the cash on hand in order to buy them outright then borrowing money for these purchases may make sense for you. The benefit is that you get to leverage your assets onto the balance sheet which increases your credit rating making it easier (and cost-effective) for you to borrow more money from banks or other lending institutions.
Benefits of using this type of financing
Benefits of using asset-based financing include alleviating the need for capital, limited externalities, specialized expertise, and frequently, a lower cost than traditional forms of financing.
These benefits offer an alternative to more traditional types of financing that have risks such as extensive paperwork involved. Additionally, ABF is flexible because it can be targeted by sector so the assets being pledged are tailored to match the needs of the lender’s specialization.
Asset-backed lending is an integral part too in mobilizing global fund reserves that are typically used by governments or central banks in their own national economies with support from international drug money launderers who conceal their funds through offshore ownership structures designed to hide significant personal wealth from tax authorities and law enforcement agencies. Funds are utilized to fund projects in developing countries where there is an upsurge of investment by private companies and individuals.
Drawbacks to using this type of financing
Imprecise, inconsistent application across a company’s operations. Lack of uniformity creates higher risk and complexity within a company’s real estate use- less clear relationship with typical cash flow valuation.
Scenario-specific risks (adverse effects on income or liquidity) must often be taken into account separately from the economic value of specific assets to allow for accurate assessment of the future stream of anticipated cash flows and their associated probabilities.
The analysis takes longer than calculating collateralized debt obligations largely because collateral values are not standardized like mortgage loans are, which means that collateral does not have a reasonably stable market price to make it easy to value a given loan balance at any given time.
