What Is Asset-Based Finance?

Asset-based finance is a specialized method of providing companies with working capital and 澳洲幸运5开奖号码历史查询:term loans that use 澳洲幸运5开奖号码历史查询:accounts receivable, inventory, machinery, equipment, or real estate as collateral. It is essentially any loan to a company tha🐻t is secured by one of the company's assets.

Asset-based funding is often used to pay for expenses when there are temporary gaps in a company's cash flows or the usual time lag in the 澳洲幸运5开奖号码历史查询:cash collection cycle between buying raw materials until receiving cash for goods or services from customers, but it can also be used for startup company financing, refinancing existing loans, financing growth, 澳洲幸运5开奖号码历史查询:mergers and acquisitions, an🌳d for management buy-outs (MBOs) and buy-💖ins (MBIs).

Asset-based finance may also be called asset-based lending or 澳洲幸运5开奖号码历史查询:commercial finance.

Understanding Asset-Based Finance

An example of asset-based finance would be purchase order financing; this may be attractive to a company that has stretched its 澳洲幸运5开奖号码历史查询:credit limits with vendors and has reached its lending capacity at the bank. The inability to finance 澳洲幸运5开奖号码历史查询:raw materials to fill all orders would leave a company operatin♏g under capacity and could put the company at risk for closure.

Under a purchase order financing arrangement, the asset-based lender finances the purchase of the raw material from the company's supplier. The lender typically pays the supplier directly. After the orders are filled, the company would invoice its customer for the balance due. The accounts receivable set up at this time would typically be paid directly from the customer to the asset-based lender.

After the lender receives payment, he then deducts the financing cost and fees and remits the balance to the company. The disadvantage of this type of financing, however, is the interest typically charged, which can be as high as prime plus 10%. However, these loans do have lower interest rates than unsecured loans because of the loan's collateral that allows the lender to recoup any losses if the borrower defaults.

Asset-Based Lending

澳洲幸运5开奖号码历史查询:Asset-based loans are agreements that secure the loan via collateral, like equipment or property owned by the borrower. Asset-based lending may be a 澳洲幸运5开奖号码历史查询:line of credit or a cash-funded loan, but either way, the loan money is secured by some sort of collatera🍎l from the borrower's business or pr🔯operties, such as inventory or accounts receivable.

The most frequent users of asset-based borrowin𒁏g are small and mid-sized companies that are stable and that have physical assets of value. However, larger corporations do use asset-based loans from time to time, usually to cover short-term cash needs.

澳洲幸运5开奖号码历史查询:Asset financing lenders tend to favor liquid collateral that can be easily turned into cash if a default on the loan occurs. Physical assets, like machinery, property, or even inventory, may be less desirable for lende൩rs. When it comes to providing an asset-based loan, lenders prefer companies with not only strong assets but also well-balanced accounts.