Asset financing is a means of obtaining a line of credit by using one or more assets as the security for the extension of the credit. Because the assets have to be free and clear of any indebtedness, as well as subject to quick liquidation, they may not be sold or transferred while the line of credit is in effect. Here is some information on asset financing, and how companies may choose to use this method of financing.
While just about any type of tangible assets can be used in structuring an asset financing line of credit, there are several types of assets that tend to be widely used. Accounts Receivable balances are often considered a great asset to use as security interest. Obtaining lending against inventories, such as finished goods that are on hand, can also be a viable option, since this type of asset is easily salable. Another example is to use a piece of property or equipment that has maintained a value that is approximately the amount of working case requested in the asset financing strategy.
There are several excellent reasons to look into asset financing. A company that wishes to expand by purchasing equipment or property may wish to use asset financing to obtain the total amount quickly, without having to dip into the operating capital. In the event that severing a relationship with a senior executive becomes necessary, asset financing can quickly supply the cash to fund an exit package without disturbing the company’s cash flow. In some cases, an asset financing type of loan may carry a smaller rate of interest than existing business loans. Under those circumstances, paying off the loans with a higher interest rate and going with asset financing is certainly in the best interests of the company.
One of the advantages to asset financing is that the transaction takes very little time to complete. Essentially, the lender simply has to qualify the value of the asset or assets that will be used for security and then verify that the assets are the property of the borrower. Once these two points are addressed to the satisfaction of the lender, the financing can be extended immediately. In addition, asset financing tends to take place without as much structure as traditional business loans. This can be very helpful, in that the lender and borrower have the ability to tailor the asset financing to the advantage of both parties.
As a third incentive, the company is able to create a line of credit using resources that are ready for immediate sale, which will certainly mean that the financing repayment can be accomplished according to the terms of the agreement. When it comes to handling an unexpected situation or opportunity, asset financing can be an excellent solution.