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What does it mean to finance an asset?

Asset financing refers to the use of a company's balance sheet assets, including short-term investments, inventory and accounts receivable management, to borrow money or get a loan. The company borrowing the funds must provide the lender with a security interest in the assets. Intangible assets are the valuable property that is not physical in nature. They include patents, trademarks, and intellectual property.

What is an Asset Based Loan?

Asset based business lending (ABL) is a types of commercial financing in which funds are provided after they are secured with assets on a company’s balance sheet. Such asset based loan collateral may be accounts receivable, commercial real estate, equipment or other business assets. Asset based lending usually comes in two types of facilities: term loans and lines of credit, but are also available in other forms like factoring, merchant cash advances and ACH financing. Factoring, cash advances and ACH and MCA financing aren’t true loans but are, instead, the sale of future earnings for an upfront cash payment. 

There are a number of asset based lenders with different collateral criteria and leverage. While some asset based lenders like to lend against a company’s accounts receivables, other lenders like to fund using a ratio of a hard assets worth (commercial real estate, personal real estate, land, equipment and machinery) or even against a firm’s inventory. Asset based business loans are especially useful for company’s that may have credit scores too low for traditional bank financing, don’t have sufficient cash-flow for bank-rate loans, or already have a traditional or SBA loan in-place. Asset based business financing is used as a 2nd position loan, or even used to consolidate other higher-interest business debt.

The main advantage of asset based business financing is the ability to monetize a company’s balance sheet to obtain financing that otherwise wouldn’t be available. But, because asset based lenders don’t necessarily require the best cash-flow and credit requirements to approve and fund, they take a higher risk than traditional lenders. Even though the ABL lender has secured the loan with the company’s assets, the process of selling off the asset can lead to losses for the funding company. Disadvantages associated asset based lending generally are the fact that they are more expensive than traditional financing (because of increased risk) loss of control of assets, and covenants associated with the asset based facility and higher fees (due to title searches, appraisals, and collateral monitoring fees. 

Advantage of Asset Finance

The main advantage of asset finance is that small businesses get more money back than they could get with a conventional bank loan. Asset-based loans also tend to be approved and financed much faster than conventional bank loans, usually within a few months. Since the cost of supervising an asset-based loan is the same for lenders and borrowers, lenders with the assets and borrowers themselves would prefer larger loans. Another advantage of asset base financing is the wide range of services that factoring and asset-based lenders offer.

Asset-Based Financing for Small Businesses

To generate working capital or to meet specific short-term cash needs, you may use certain short-term assets, such as inventory or accounts receivable, as collateral for commercial loans. Personal assets, such as insurance policies, can also serve as a source of short-term financing.

To generate working capital or to meet specific short-term cash needs, small businesses may use certain short-term assets as collateral for commercial loans.

Cash Flow Management

Asset-based financing provides a way for cash to flow - struggling companies get the working capital they need, even if their credit is less than perfect. It is a great way for a company to quickly address cash flow problems, and it is one of the most cost-intensive - effective and efficient ways to finance businesses.

The 10 Most Important Types of Asset Based Financing

Account Receivables:

Accounts receivable (AR) is the amount owed to a company resulting from the company providing goods and/or services on credit. The term trade receivable is also used in place of accounts receivable. These are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. 

Inventory:

Inventory is the array of finished goods or goods used in production held by a company. Inventory is classified as a current asset on a company's balance sheet, and it serves as a buffer between manufacturing and order fulfillment. Through our online accounting services, we also value any ending balances in your business’ balance sheet.

Invoices:

An invoice is a time-stamped commercial document that itemizes and records a transaction between a buyer and a seller. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal and provides information on the available methods of payment. 

Commercial real estate:

Commercial real estate refers to properties used specifically for business or income-generating purposes. The four main classes of commercial real estate include: office space; industrial; multi-family rentals; and retail.

Investment real estate:

Real estate investing is the purchase, ownership, lease, or sale of land and any structures on it for the purpose of earning money. Real estate generally breaks down into four categories: residential, commercial, industrial, and land. You need to be brave and intelligent enough to learn through a real estate accounting guide.

Personal real estate:

Personal property is a class of property that can include any asset other than real estate. The distinguishing factor between personal property and real estate, or real property, is that personal property is movable; that is, it isn't fixed permanently to one particular location. 

Land:

A business loan secured by collateral that is tangible – like equipment or real estate, compared to unsecured loans that are not secured by any collateral. When investors exhaust other financing options, like selling shares of the business or selling assets, asset based loan provide an opportunity to raise cash from leveraging account receivables or existing equipment.

Equipment and Machinery:

Equipment Financing is usually included as a component of an asset-based loan in a borrowing base certificate, and it gives borrowers the opportunity to include their personal equipment or machinery on their borrowing base certificate (as collateral) to attain more funding.

Bank Accounts:

When the borrower needs additional working capital, they request an advance, and the capital is sent directly to the borrower’s bank account. The borrower can request as little or as much capital, depending on what their needs are at any given time. 

Credit Card Processing Account:

Your customers' accounts are charged for the transactions, with deposits then made into your merchant bank account. How to evaluate credit card processors.

Need asset based financing?

Rayvat Accounting is a leading provider of asset based financing. For more information, get an instant quote or call us toll-free at +1 (888) 865-5255.