Reviewed by Oct 05, 2020| Updated on
A company uses its balance sheet assets, such as short-term investments, inventory, and accounts receivable to borrow money or get a loan and is called asset financing. In other words, a loan obtained by companies based on their financial strength is known as asset financing.
The loan so obtained is typically used for the growth and expansion of the company so that the full value of the asset need not be paid upfront. The borrowing company must provide the lender with a security interest in the assets. The asset's value is divided into smaller regular payments along with interest on the outstanding balance.
Asset financing is different from traditional financing, as the borrowing company offers its assets to get a cash loan. The traditional financing, such as project-based lending, involves a long procedure that includes business planning and other factors.
The former kind of financing is preferred when a company needs a short-term cash loan or working capital. Usually, the borrowing company pledges its accounts receivable; pledging the inventory assets is also seen.
Asset financing and asset-based lending are slightly different. In asset-based lending, a person borrows money to purchase a home or car, and the asset being purchased acts as collateral for the loan. If the loan is not repaid within the specified time, the lender reserves the right to seize the asset and sell it to pay off the outstanding balance of the loan.
In contrast, the asset a business uses to qualify for the loan is not considered as direct collateral in the case of asset financing. Businesses use the assets they currently own to qualify for the financing facility. However, if the business defaults on repayment, the lender can still seize the asset and try to sell them to balance the loan amount.