What is the difference between asset-based lending and asset financing?

By Ken Clark AAA
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.

RELATED FAQS

  1. How is accounting in the United States different from international accounting?

    Learn how accounting standards differ between the International Financial Reporting Standards, or IFRS, and generally accepted ...
  2. Which financial statements are most important when performing ratio analysis?

    Learn which financial statements are used for ratio analysis. Find out what financial data is needed to conduct fundamental ...
  3. What are some of the advantages and disadvantages of DuPont Analysis?

    Learn about the DuPont analysis financial ratio, and understand some of its primary advantages and disadvantages.
  4. Can unearned rent be considered deferred revenue?

    Learn whether unearned rent can be considered deferred revenue. Understand what accounting practices are used to account ...
RELATED TERMS
  1. Convention Statement

    A document filed by an insurance or reinsurance company that ...
  2. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  3. Nonadmitted Balance

    An item on an insurer’s balance sheet that represents reinsured ...
  4. Earned Premium

    The amount of total premiums collected by an insurance company ...
  5. Best's Capital Adequacy Relativity (BCAR)

    A rating of an insurance company’s balance sheet strength. Best’s ...
  6. Insurance Regulatory Information System (IRIS)

    A collection of databases and tools used to analyze the financial ...

You May Also Like

Related Articles
  1. Investing

    Analyzing Google's Balance Sheet

  2. Stock Analysis

    Freeport-McMoRan Is Seeking A Helping ...

  3. Stock Analysis

    Chesapeake Energy Sees History Repeating ...

  4. Stock Analysis

    How To Read Apple's Balance Sheet

  5. Investing Basics

    How To Calculate Goodwill

Trading Center