Definition: Asset financing allows companies with limited financial resources to raise funds from a variety of sources without relying on credit card debt or paying down existing debt through interest payments. Commonly used assets include consumer receivables (which include unpaid debt on purchases), inventory, plant and equipment, goodwill, property rights, and intellectual property.
The primary purpose of asset financing is to raise money for new business growth. However, it can also be used to finance personal purchases or equity subscriptions in businesses. In some cases, it can also be used to obtain short-term funding to minimize the risk of rising debt in the future. In general, asset financing will reduce the amount you owe on your debts as long as you keep the underlying assets viable and use them to make new investment opportunities.
Asset financing is a streamlined financing option that provides businesses with needed capital instead of traditional bank loan applications and an upfront payment. Unlike bank loan applications, which are often secured by physical property and equipment, asset financing requires no collateral. It is usually used for cash flow needs rather than asset debt service. Asset financing may also be used by businesses in conjunction with their traditional financing on an as-needed basis when deemed necessary.
An asset financing might be used to purchase manufacturing equipment for your business or refinance your existing debt. Or, asset financing might be used to help you pay down existing debts or start up new ventures. Often, companies or financial institutions will offer asset financing to entrepreneurs who have started up businesses with the idea of selling the products or services. An asset financing is similar to a loan, but it allows you and the business to pay off the debt over time instead of having it last indefinitely.
For investors, asset financing can give them a chance to buy low and sell high without waiting for full maturity on their existing loan. Companies typically use asset financing to attract investors by offering slightly lower-than-normal interest rates and using creditworthy borrowers who qualify for government or corporate-backed loans.
Asset financing vs. Asset-based lending
Asset financing is for homeowners who want to borrow against their primary residence rather than pay cash upfront. On the other hand, asset-based lending is for businesses that want to borrow against the property they plan to use as collateral. In both cases, the lender agrees to assume all of the borrower’s Mortgage-backed Securities, which means that they are on the hook for any losses on loan.
Asset financing means accepting debt as though it were cash. If you borrow money to start a business, for example, your return on loan will be based on the number of assets you develop and your profits. The money you use for the loan comes from the sale of assets. On the other hand, asset-based lending applies to any borrowed money that is used for the purpose.
Asset financing is often referred to as short-term or short-term sales financing. Typically an asset financing is for someone who has little disposable income but wants to go into business or buy something to keep their mind off their immediate financial problems. You can use asset financing to help someone who has fallen behind on their bills or can’t make their mortgage payments. Or you could use it to help someone buy the item they want without buying the house or car first.