It is important to first understand the definition of asset based financing. This will help us to know, why we should avail it and consider as a means to obtain cash requirements leading to the increased working capital. Assets of the company or business are pledged to the lending company against the loan amounts acquired by the borrowing company.



Asset based financing is a specialized method of providing structured working capital and term loans to help businesses, companies large or small to stabilize or grow with the help of their assets, which are pledged as collaterals to keep secure the lending amounts. Specific assets of the businesses help to secure loans. The assets specified are anything from machinery, equipment, real estate to purchase orders of raw materials and finished goods. This kind of funding is employed in the case of starting a new company, to finance growth and expansion in the business, refinance existing loans, and also in case of mergers and acquisitions, and management buy-ins and buy-outs that take place. Asset based financing is a great source of capital for a growing company or for other purposes as well.

One of the ways to handle an asset-based finance is to finance a purchase order. This is one way of handling the finance of a company that has stretched its credit limits with the vendor company. In such a case the asset based lender finances the purchase of the raw material, which in turn, then assigns the purchase order to the lender. When the purchase order has been duly filled, the payment is made to the lender, who then deducts its cost and fees and remits the balance to the company. The interest charged in such a type of loan is typically steep.

The company whose assets are being pledged does not give up ownership of the assets or the company itself, to obtain the loan. The only disadvantage is in case of failure of repayment of loans, there may arise a situation, where the lender acquires all the attached assets.

How does an asset-based loan generally get utilized? These loans are used mainly for expansion and growth of the company and businesses, for which reason the loan was acquired. So also, they are used in cases of business mergers and acquisitions. Another purpose for which an asset-based loan is sought is for management buy-ins or buy-outs. Turnaround financing is one more reason for which loans are normally used. They are also used for refinancing of existing business loans.

One of the methods to consider asset based financing is to raise capital. With the leverage growth in sales today, this is one good way of assured asset based finance. Assets such as equipment and commercial real estate also fall within the category of assets that are used to avail funds. Asset based financing for capital is also used because of lack of flexibility in bank financing. Inventory against raw materials and finished goods are used as security, in the case of revolving credit lines. Asset based financing also helps access to large amounts of cash that have been invested in the infrastructure.