Asset Based Financing
Meaning and definition of asset based financing
Asset based financing is a specialized technique of providing structured working capital and term loans which are tenable by accounts receivable, machinery, inventory, equipment, and real estate. Putting another way, asset based financing is a means for fast growing, cash-strapped business entities to congregate to their short term cash requirements. Generally, companies can use their assets for generating cash flow through the way of factoring or asset based loans. This form of funding is helpful for startup companies, financing growth, refinancing existing loans, mergers and acquisitions, and management buy-ins (MBIs) and buy-outs (MBOs). In spite of the stigma associated with using the assets to get cash, the asset based financing is becoming more popular every day.
As stated by Investopedia, purchase order financing is one of the good examples of asset based financing. This might seem appealing to a company which has extended its credit limits with vendors and has attained its lending power at the bank. The inefficiency for financing raw materials to accomplish all orders would put down a company to operate under capacity. The asset based lender provides finance for the purchase of raw materials, and the purchase orders are thereafter assigned to the lender. Once these orders are completed, payment is made to the lender. These payments are the deducted by them lender from the cost and fees thus remitting the balance to the bank.
Advantages and disadvantages of asset based financing
The main benefit of asset based financing is that small business companies are able to get more cash faster than they could have got from a conventional bank loan. Another advantage of asset based financing is that factors and asset based lenders proffer wide ranging services together with accounts receivable processing, collections and invoicing.
Besides the aforesaid advantages of asset based financing, there are also certain drawbacks to this technique. The most important disadvantage of factoring and asset based loans is the expense incurred. The use of assets for generating cash flow raises the cost of funds thus reducing the profit levels. it is, therefore, important to evaluate your situation carefully and find out whether this financing type is needed to keep your company afloat or expand it.