Asset finance is very different from traditional financing because it allows the borrower to swiftly obtain a cash loan by offering some of its assets. A more involved procedure involving business planning, estimates, and other factors would be required for a standard financing arrangement, such as a project-based loan. When a borrower requires working capital or a short-term cash loan, asset financing is most frequently used. When using asset finance, the borrowing company typically promises its accounts receivable; however, it is not unusual to use inventory assets in the borrowing process.
With a small variance, the words asset finance and asset-based lending essentially refer to the same thing. When a person uses asset-based lending, the house or the car is used as security for the loan when they borrow money to purchase a home or a car. The lender may seize the automobile or the property and sell it to recoup the loan’s balance if it is not repaid within the allotted time period. If this happens, the loan goes into default. The same idea holds true for companies purchasing assets. When someone uses asset financing, other assets that are used to help them qualify for a loan are typically not treated as direct security for the loan’s principal.
Businesses frequently employ asset financing because they like to borrow money against their existing assets. Collateral for a loan may include receivables, stock, machinery, even buildings and warehouses. These loans are typically always taken out to cover short-term finance requirements, such as funds to cover staff wages or to buy the supplies required to make the products that are sold. As a result, the business is utilising its existing assets rather than investing in new ones to cover a shortfall in working capital. However, if the business continues to be in default, the lender may still attempt to reclaim the loan amount by seizing assets and selling them.