If you are someone who has just started a business, in the process of starting a business or have a business that they initially started from scratch then you must know the need of financial capital and the importance of financing for this purpose.

To stabilize, grow, or expand your business you need the right amount and right type of finances that suit the needs of your business. Finding one has always remained a pressure point for many small business owners because of the banks not readily providing loans to them for their limited operations history and background.

But luckily for small business owners, many options are now available to them through alternate financing sources. One of these sources is the asset-based business funding or the asset-based finance.

Understanding Asset-Based Finance

Asset-based finance, an alternative financing source, is a specialized funding that provided loans or working capital to small business owners against some collateral. This collateral is basically one of the company’s assets which might include accounts receivable, equipment and machinery, inventory, or real estate. They are used for a start-up company’s financing but also are typically used as a type of funding that pays for expenses of the company when there is a gap in its cash flows because of its cash conversion cycle.

This type of funding offers its borrowers, usually small business owners, type of flexibility they are looking for in their financial arrangements.

Forms of Asset-Based Business Funding

Since a company can and has many types of assets, even though if it is a start-up, these assets are used to finance this funding because of which asset-based finance comes in numerous forms. What business owners need to do at this stage is to decide which form of financing is better for them and the one they can easily avail. These forms most commonly include the following.

Factoring

This is a funding process where your accounts receivable or outstanding invoices are sold to a third party, the factoring company, for a discount price. The factoring company then advances a percentage of outstanding invoice’s value to your business. Once the cash has been collected from the accounts receivable, the rest of the invoice value minus the factor’s fee and other potential costs is then paid to you. The factoring company basically takes on the job of collection for you, thus chasing your customers for invoice settlement and processing of payments.

Invoice Discounting

This form of funding is similar to factoring except for one thing. Just like factoring you would receive what has been advanced to you after deducting other associated costs. But here rather than a third party taking control and responsibility of collections you yourself are responsible for it.

Asset-Based Lending

This type of funding involves securing the loan against a combination of assets. These include a wide range of assets like stock, intellectual property, or plant and machinery. This type of funding gives the option to the lender to seize the assets in case the borrower defaults on his payments and eventually the loan. The lender is allowed to sell these assets to pay off the remaining debt.