Most traditional financing options have their basis in a company’s cash flow. If you are a company with a weak cash flow, your lending options may have limits.
Another option for companies such as this is to use assets that the company owns or wants as the basis of a loan. As you might imagine, this type of lending has the name asset-based lending.
Everything You Should Know About Asset-Based Loans
A typical method of asset financing is when a company gets a loan based on assets like equipment, property, or machinery they wish to purchase. When these assets get acquired, companies use them in any manner they wish, and then they make regular payments to a lender over time for the use of set assets.
If a company already has substantial assets, it may be able to use them as collateral for a loan. So while a traditional loan has its basis in a company’s cash flow or creditworthiness, loans like this have their basis in the value of the assets the company will put up as collateral. This type of lending is often an excellent way for a company to expand its business by obtaining additional assets that generate revenue for the company.
No matter which type of asset financing a company wants to pursue, lenders will base the loan amount on their valuation of the assets. What this means to many companies is that they may be able to obtain the financing they otherwise would not qualify to get.
The Variety of Asset Financing Options Available to Companies
One of the most common asset-based lending types is hire purchase. This situation is where a company gets to use assets acquired with the proceeds of a loan and then pay off the debt over time. Once this debt gets paid, it is customary that a lender will allow the company to buy the equipment at a reasonably low rate.
Another option for businesses is to enter into an equipment lease with a lender. One of the benefits of this scenario is that it gives companies quite a bit of flexibility in terms of the assets they can acquire.
In this scenario, companies enter into a lease much as they would rent a space for their business. The difference is that in this type of lease, a company can choose to return the equipment, extend the lease, or even buy the equipment from the lender at the end of the lease.
Companies love the notion of asset-based lending because it allows them to acquire equipment and assets with very little of their own working capital. This financing vehicle is also a great way for companies to expand their potential financing options.