What is Asset Finance?

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What is Asset Finance?

Asset finance is a type of finance used by businesses to obtain the equipment they need to grow. It usually involves paying a regular charge for use of the asset over an agreed period of time, thus avoiding the full cost of buying outright. The most common types of asset finance are leasing and hire purchase.

What is ‘Asset Financing?’

Asset financing refers to the use of a company’s balance sheet assets, including short-term investments, inventory and accounts receivable, in order to borrow money or get a loan. The company borrowing the funds must provide the lender with security interest in the assets. This differs considerably from traditional financing, as the borrowing company must simply offer some of its assets in order to quickly get a cash loan.

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 becoming a more popular and common occurrence.

Asset Financing Versus Asset-Based Lending

At a basic level, asset financing and asset-based lending are terms that essentially refer to the same thing, with a slight difference.

With asset-based lending, in an instance where an individual borrows money to buy, for example, a home or even a car, the house or the vehicle serves as collateral for the loan. If the loan is not then repaid in the specified time period, it falls into default, and the lender may then seize the car or the house in order to pay off the amount of the loan. With asset financing, if other assets are used in order to help the individual qualify for the loan, they are generally not considered are a direct collateral on the amount of the loan.

Asset financing is typically used by businesses, which tend to borrow against assets they currently own. Accounts receivable, inventory, machinery, and even buildings and warehouses may be offered as collateral on a loan. These loans are almost always used for short-term funding needs, such as cash to pay employee wages or to purchase the raw materials that are needed to produce the goods that are sold.

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