Asset financing allows companies to obtain credit by using assets as collateral. Accounts receivable and inventory are commonly used assets. It is a quick and flexible financing option that can be used for various purposes, such as purchasing equipment or financing an exit package. The transaction is quick and requires minimal structure. Repayment can be achieved by selling the assets.
Asset financing is a means of obtaining a line of credit by using one or more assets as collateral for the extension of credit. Because the assets must be free and clear of any debt, and subject to prompt liquidation, they cannot be sold or transferred while the line of credit is in effect. Here is some information on asset financing and how companies can choose to use this method of financing.
While almost any type of tangible asset can be used to structure an asset finance 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 a security interest. Borrowing against inventory, such as available finished goods, can also be a viable option, as this type of asset is easily salable. Another example is using property or equipment that has held a value that is approximately the number of work cases called for in the asset financing strategy.
There are several excellent reasons to consider asset financing. A business that wants to expand by purchasing equipment or property can use asset financing to get the full amount quickly, without having to tap into operating capital. In the event that a relationship with a senior executive needs to be broken, asset financing can quickly provide the cash to finance an exit package without disrupting the company’s cash flow. In some cases, a type of asset finance loan may have a lower interest rate than existing business loans. In those circumstances, paying off the higher interest rate loans and opting for asset financing is undoubtedly in the best interest of the business.
One of the advantages of 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 to be used to guarantee security and then verify that the assets are owned by the borrower. Once these two points are addressed to the satisfaction of the lender, the financing can be extended immediately. Additionally, asset financing tends to take place without as much structure as traditional business loans. This can be very useful, since the lender and the borrower have the ability to tailor the financing of the assets to the benefit of both parties.
As a third incentive, the company can create a line of credit using resources that are ready for immediate sale, which will certainly mean that repayment of the financing can be achieved according to the terms of the agreement. When it comes to handling an unexpected situation or opportunity, asset financing can be an excellent solution.
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