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What is Asset Financing?

Updated on February 27, 2024 , 418 views

Asset financing is borrowing money or taking a loan by keeping the Balance Sheet assets of a company. These assets include accounts and inventory receivable, short-term investments, and more.

Asset Financing

The company that is borrowing funds must offer a security interest in these assets to the lender.

Explaining Asset Financing

In comparison to traditional financing, asset financing is considerably different. This is because the borrowing firm provides some of the assets to get an instant cash loan. On the other hand, a traditional financing, such as a project-based loan, comprises a prolonged process that includes business projection, planning and more.

Often, asset financing is used when somebody required short-term working Capital or cash loan. In most situations, while some borrowing companies pledge accounts receivable; however, most of them also use inventory assets as well.

Generally, asset financing and asset-based lending are referred to as the same thing. However, they have a slight difference. With the asset-based lending, when somebody borrows money or gets a loan to purchase a vehicle or a property, they have to keep the same for Collateral.

Upon going Default, the vehicle or the property is seized by the lender to pay off the loan’s amount. The same concept applies to asset financing as well. However, the only difference is that the latter can only be used by businesses.

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Types of Loans in Asset Financing

Back in the days, asset financing was only considered as the last option to obtain finances. However, over a period of time, the stigma around this type has decreased to a great extent. Primarily, it is true for startups, small companies and other firms that don’t have sufficient credit rating to get funding from alternative sources. Basically, there are two different types of loans that are provided.

  • Secured Loans: This one is the most traditional and basic type where a company borrows funds by pledging an asset as collateral. The lender regards the asset’s value instead of looking at the creditworthiness of the company. If the firm is unable to pay back, the lender gets the right to seize the asset.
  • Unsecured Loans: This type doesn’t involve any collateral; however, the lender may still have a certain claim on the assets of the company if the repayment is not made.

Out of these two, secured loans generally have a lesser interest rate, making them an interesting and attractive option for companies. This is because if the borrowing firm goes bankrupt, typically, secured creditors get a massive proportion of claims through assets.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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