What is Asset Financing?

Asset financing involves the use of existing assets as collateral in order to secure a loan. The concept usually involves the pledging of trade receivables and inventory to obtain a short-term loan that is intended to fund a firm's working capital needs. For example, a company could use the money to buy the raw materials required to complete a customer order. The most common use of asset financing involves the pledging of trade receivables, since receivables are easily convertible into cash. Inventory is not as liquid an asset, so lenders are less willing to accept it as collateral. Smaller companies and startup businesses are the most common users of asset financing, because they are not yet in a position to qualify for longer-term debt that has a lower interest rate associated with it.

Asset Financing Advantages

There are several advantages to using asset financing. One is that it is one of the better options for a small or struggling business that cannot otherwise obtain financing. In addition, lenders are usually willing to provide asset financing fairly quickly, which is a major plus for businesses that are facing a cash crunch.