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Asset-based financing: what is that?

Alternative to 'regular' bank financing

Asset-based financing as an alternative to 'regular' bank financing. This has been a growing trend for some years now and is increasingly becoming part of the organisation'sfinancing mix. An often-used Dutch term for this is 'object financing'. This form of financing involves financing based on a certain collateral as a counterweight. In the case of leasing, this could be an asset (machines or cars). Factoring involves debtors, stocks, purchase orders or creditors (reversed financing).

Asset based financing is provided by a leasing or factoring company. The advantage of a leasing or factoring company is that they mainly look at the quality of the underlying asset and to a lesser extent at the balance sheet, profit and loss account and history of your company. Therefore asset based financiers are often willing to provide more credit than 'regular' bank financing.

The collateral as a counterweight

The more collateral and/or the more secure the collateral, the cheaper the loan and the lending opportunities. The Basel 3 and 4 regulations ensure from 1 January 2022 that financiers are rewarded by providing asset-based financing. Examples of suitable collateral are purchased inventories or the accounts receivable portfolio (provided the performance is clear).

Suitable for growing businesses

To avoid having money tied up in your working capital, you can choose to finance your outstanding invoices or stock. Instead of money getting stuck in your net working capital, you can use the money to realise growth. Asset-based financing is therefore ideally suited to fast-growing business-to-business companies. For companies that have to deal with seasonal influences or companies where the money is tied up in stocks or debtors for a long time, asset based financing can also be a good solution. Debtors and stocks can be offered as collateral against cash. Finally, specific assets are financed to a greater extent than a general bank facility. For example, for debtors, up to 90% of outstanding receivables can be financed, whereas this is often a maximum of 70% with a bank overdraft facility.

Flexibility in financing

The greatest advantage of asset-based financing is its flexibility. The greatest need for financing often arises when a company has a lot of orders coming in. With asset based financing you can increase your credit based on your inventory and purchases. In another scenario, for example, an increase in the accounts receivable balance could be financed using asset-based financing. Your credit limit grows along with your financing needs, so you don't borrow more than you need.

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Marieke Klaassen
Marieke Klaassen van BeurdenSenior Corporate Finance Advisor

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