When companies think of financing for their business, they often think of the types of loans that have a basis in their cash flow or credit score. The problem for companies that fall short in either of these areas is that they may not be able to get the financing that they need.

Another alternative for these types of companies is to use the company’s assets as the basis of their loan. This type of financing often goes by the name of asset-based lending.

Everything You Should Know About This Type of Lending

One of the most common types of financing is when companies get a loan based on equipment such as machinery, property, or other equipment they want to buy. When a company requires these assets, they get the financing they need to make the purchase and then make regular payments to a lender for these assets.

In the same vein, companies that already have substantial assets can use them as collateral to get a loan. So compared to a traditional loan based on a company’s cash flow, this loan has its basis in the value of the assets used for the loan. This financing is often an excellent way for a company to expand its business by obtaining additional assets.

This type of financing is often valuable to companies that have not been in business for very long or are on the smaller side. The reason for this is that the value of their assets may be a much better form of collateral for a lender than their credit score.

The Various Types of Asset-Based Lending Options Available

A widespread type of lending in this area is something called hire purchase. This scenario is when a company gets to use assets purchased with loan proceeds and then pay that debt off over time. It is not uncommon for lenders to allow companies to buy the assets at the end of the loan term for a very low rate. 

Companies can also choose to enter into an equipment lease with a lender. This type of financing tends to give companies much more flexibility regarding what type of assets they can acquire.

The type of lease a company would enter into is much the same as when they rent a commercial space for their business. The difference in this arrangement is that companies can return the equipment, extend their lease, or buy the equipment from the lender at the end of the lease.

Companies pursue asset-based lending because it allows them to acquire substantial assets using very little of their own capital. This type of financing also allows companies to find a wider variety of financing options than simply going to a bank for a traditional loan.