Asset-Based Financing

To generate working capital or to meet specific short-term cash needs, small businesses may use certain short-term assets as collateral for commercial loans. The most common types of asset-based financing are the following:

• Accounts receivable financing uses the receivables as collateral. As the business collects the receivables, the proceeds are used to repay the loan or line of credit.
• Inventory financing is a similar type of loan, using inventory as collateral.
• Factoring is a process whereby accounts receivable are actually sold to a third party (the factor) for a discount price, after which the factor takes on the job of collections.