what is asset financing 
asset financing refers to the use of a company s balance sheet assets including short term investments inventory and accounts receivable to borrow money or get a loan the company borrowing the funds must provide the lender with a security interest in the assets understanding asset financingasset financing differs considerably from traditional financing as the borrowing company offers some of its assets to quickly get a cash loan a traditional financing arrangement such as a project based loan would involve a longer process including business planning projections and so on asset financing is most often used when a borrower needs a short term cash loan or working capital in most cases the borrowing company using asset financing pledges its accounts receivable however the use of inventory assets in the borrowing process known as warehouse financing is not uncommon the difference between asset financing and asset based lendingat a basic level asset financing and asset based lending are terms that essentially refer to the same thing with a slight difference with asset based lending when an individual borrows money to buy a home or a car the house or the vehicle serves as collateral for the loan if the loan is not then repaid in the specified time period it falls into default and the lender may then seize the car or the house and sell it in order to pay off the amount of the loan the same concept applies to businesses buying assets with asset financing if other assets are used to help the individual qualify for the loan they are generally not considered direct collateral on the amount of the loan the lender may include a covenant as part of the loan contract that bans the borrower from using pledged assets to secure other loans asset financing is typically used by businesses which tend to borrow against assets they currently own accounts receivable inventory machinery and even buildings and warehouses may be offered as collateral on a loan these loans are almost always used for short term funding needs such as cash to pay employee wages or to purchase the raw materials that are needed to produce the goods that are sold so the company is not purchasing a new asset but using its owned assets to make up a working cash flow shortfall if however the company goes on to default the lender can still seize assets and attempt to sell them to recoup the loan amount secured and unsecured loans in asset financingasset financing in the past was generally considered a last resort type of financing however the stigma around this source of funding has lessened over time this is primarily true for small companies startups and other companies that lack the track record or credit rating to qualify for alternative funding sources there are two basic types of loans that may be given the most traditional type is a secured loan wherein a company borrows pledging an asset against the debt the lender considers the value of the asset pledged instead of looking at the creditworthiness of the company overall if the loan is not repaid the lender may seize the asset that was pledged against the debt unsecured loans do not involve collateral specifically however the lender may have a general claim on the company s assets if repayment is not made if the company goes bankrupt secured creditors typically receive a greater proportion of their claims as a result secured loans usually have a lower interest rate making them more attractive to companies in need of asset financing 