A:

In the most common usage, the terms "asset-based lending" and "asset financing" refer to the same thing. Asset-based lending generally refers to a business using its assets as collateral for a loan. If the loan is not repaid and falls into default, the lender may seize and sell the collateral to pay off the loan amount.

Asset financing differs slightly from the common understanding of collateralized loans. Normally, when an individual borrows money to purchase a home or car, the house or the vehicle serves as collateral. Other assets, which may have been used for loan qualification purposes, typically are not considered direct collateral for the loan.

Businesses, however, often borrow against currently owned assets, such as machinery, accounts receivable (AR) and inventory. The money received from these loans against collateral often is used to fund short-term needs like employee payroll and raw materials purchases.

(For more on this topic, read When Companies Borrow Money.)

This question was answered by Ken Clark.

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