Quite often, business financing revolves around a particular business’s cash flow. This method means the ability to borrow usually depends on the cash flow’s stability and strength. 

An additional method of financing can occur based on assets owned by a company. This type of lending has the name asset-based lending, or ABL.

The Two Ways Companies Can Use Their Assets to Finance a Loan

The first type of asset financing is when a company gets financing to secure assets such as equipment, property, or machinery. The companies can use these assets as they see fit and will make regular payments to a lender over time for the use of the assets. 

The second way assets can get used for a loan is when companies use their current assets as collateral. In comparison, a traditional loan often gets approved by a lender based on a company’s creditworthiness, not on assets owned.

In an asset-based loan, lenders will come up with a value for the assets and base the loan amount on that figure. This lending method is a fantastic way for companies that may not qualify for traditional financing to receive a loan. 

The Types of Asset Financing Companies Can Receive

There are several reasons that a company can acquire asset-based financing. One of these is a hire purchase, where a lender purchases an asset on behalf of the company borrowing money. 

In this scenario, the company can use the asset while it pays off the debt. Once the debt gets paid off, the company borrowing the money can choose to purchase the asset at a generally low rate. 

Businesses can also use lenders to enter into equipment leases for them. Companies like this method of borrowing because of the flexibility it offers them. 

With this method, a business will enter into a lease agreement with a lender to use equipment for a certain amount of time. Once the lease is up, the business can return the equipment, extend the lease, or even buy the equipment from the lender.

An alternative to this method of lending is something called an operating lease. These leases generally are for longer terms but usually not for the full life of a particular asset. The benefit to a business of this type of loan is that it is generally cheaper for a business in the long term.

One of the true benefits of asset-based lending is that it puts less strain on the working capital and the cash flow of a company. It also affords companies a different path to receive financing than traditional financing methods.