Four Facts About Asset-Based Financing
1. It’s an alternative way of financing
The industry complements the work of conventional lenders and classic loans but stands alone as its own alternative way of financing.
In asset-based financing, a company allows an asset – a vehicle of piece of equipment – to slowly be paid off through a lease, loan, conditional sales contact or line of credit. The financing company owns the equipment or vehicle, which acts as the principal collateral for the customer’s obligation to make regular payments, until the customer buys or returns the asset.
2. Applications are based on cash flow
The essential determining factor is not customer net worth, as it would be in conventional lending, but cash flow (can the customer generate sufficient revenue by using the equipment to afford the monthly payments?). This form of financing offers an advantage to customer’s, allowing them to use vehicles or equipment without using up their regular bank credit.
3. Financing professionals are experts in asset’s value
It is important for people in asset-based financing to be experts in different equipment styles and vehicles, how they will be used, and their value at every stage of their useful life – from receipt of the customer’s application to the asset’s return or repossession. In the case of a lease, finance companies must accurately forecast the value of the asset in the event they get it back several years later.
4. It’s a vital source of financing for the Canadian economy
The leasing industry compliments traditional banking and other financial lending, providing incremental capital to increase the pool of available credit in Canada and provide a vital competitive alternative in the financial services sector.