Asset Financing

What Is Asset Financing? – LegalAdviceOnline

What Is Asset Financing?

For many companies and even for most small businesses, the question “what is asset financing?” is an important one, since it gives them an idea of how they are going to get money to expand their business. The problem is that they are not always clear about what is meant by “asset financing.”

In simple terms, asset finance is all about using something – in this case, money – to create additional value and in turn, increase profits for a particular business. 

In business terms, an asset is any facility or resource owned by an entity or a company that has a specific, identifiable use or benefit. It’s anything that will create positive cash value for the business. 

For instance, you can use the funds generated from the sale of your house to fund the purchase of a new, more expensive house, or you can use the proceeds from your monthly lease payment to make repairs and improvements to your current home.

Some of the most common types of asset financing include lease options, lease payments, commercial real estate loans, bridge loans, royalty payments, reverse lease options, and leasing payroll expenses.

Typically, the lessors (landowners) will sell their property at a price that is less than the fair market value, and then they will have to pay a set amount of money (called a depreciated fee) on a monthly basis to the lessee. 

They can also choose to take a line of credit from a bank or other lending source. In exchange for borrowing the money, the lessee must pay some of his or her monthly lease payment to the lessee (this is called a down payment). Whatever arrangement the lessee and the lessor may come up with regarding payments, usually results in increased equity for both parties.

What Does An Asset Financing Company Do?

For the person looking to start a small business, they usually look to find a financing company to help them get their start-up money. They are either unsure of the process or believe that they can handle the entire process themselves but this is usually not the case. 

A good example would be a person who has just opened a small business, owns one or two small assets and needs to create some additional funding for various reasons. 

The reason being that most banks are not as willing to loan money to someone without any collateral as they have been in the past when there was more competition.

Asset financing companies act as the middle man. They buy your assets from you for whatever amount they have agreed to lend you. Once they have the assets they will then turn around and sell them to you for the amount you have asked for. 

This allows the business owner to not only get the money they need fast but also to keep the majority of their profits from the sale as well. Most companies will take about 70% of the profits from the sale in interest.

This type of loan is best used for a business that has one or two assets such as computers or other electronics. It is also very useful for businesses that are starting out and do have not much money to use for their business. 

The asset financing company will be able to review your business plan and help you determine if you are in fact eligible to receive a loan. It is always recommended to have your business plan reviewed by several companies before you actually apply for the loan.

What Are The Ways Of Financing Assets?

The whole concept of financing assets is really very confusing. Most of us do not know what we are actually financing if there is a proper way of doing so. Assets can mean different things to different people, but the basic idea remains the same. Let’s take a look at what are the ways of financing assets.

First, you have tangible assets like property. These assets cannot be destroyed nor can they be pawned. If your property is damaged or destroyed, then it is lost for good, unless you can get it rebuilt. 

For this, you need to take out a loan from a bank or a lending company. Usually, you will only be required to pay back the money you borrowed plus interest.

Second, you also have intangible assets like intellectual property. Intellectual property can be a book or a computer program that was written by someone else and is protected under copyright law. 

Under most laws, you cannot do anything with the material except sell it. Profits earned from the sale of the material are the only proceeds you need to pay off your creditors.

Third, there are the financial assets like accounts receivables and inventory. When a customer pays for your products or services, the money is credited to your accounts receivable bookkeeping. 

The money is automatically deducted from your inventory stock whenever it is sold. This is the simplest way of financing assets. If you can buy enough stock to cover all your inventory costs, then there is no need for an actual cash balance in your account.

Another way of financing assets is to borrow from other people or companies. A loan is secured by personal property (like a house) or assets in your business. To get a loan, you have to convince a lender that what you are offering them is worth the amount they are borrowing. 

For instance, if your business has ten thousand dollars in sales, but the value of the merchandise you sell is only five hundred dollars, your lender may insist on the sale of at least seventy five per cent of the product’s price. This means, that you will have to find a buyer for fifty per cent of the total amount borrowed.

These are just some of the ways of financing assets. There are more involved in-depth procedures in which you can finance your business using various financial tools. If you are not yet aware of the available options, then get online and learn more.

Also Read

What is Financial Risk Management?

What Is Consolidation In Stocks?

What Is A Building Loan?

Conclusions Of Asset Financing

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