- 05 Aug
A Simple Explanation Of Asset Based Finance.
We had a recent meeting with one of our funding partners, that position themselves as an asset based finance company. That means that they are able to fund against a variety of assets, including the book debts of companies.
Simple Explanation Of Asset Based Finance
They gave a really simple explanation of asset based finance (sometimes called Asset Based Lending or ABL), which I thought summarised how it works perfectly.
An asset finance company looks at the assets within a clients business, in order to raise business finance against those assets.
Our funding partner described the way that the process works as follows. The ABL funder will ask how much money the client company wants to raise, and what available assets there are to support that funding. The assets could take the form of book debts, plant and machinery, property or stock and work in progress. The asset finance company will then come up with a blended formula funding against these assets in order to provide the amount of finance that the company is looking to raise (various percentages funded against each asset class).
Limitations Of Receivables Financiers Versus ABL Funders
There are interesting differences between the asset finance approach of different providers, particularly those that operate within the receivables financing market place. Some invoice funders require that invoices are the central asset within their funding formula for ABL. This does not always apply to other funders though. In the cases of some invoice finance companies, the funding formula will go further to insist that funding against assets other than book debts, does not exceed a certain proportion of the overall funding provided. This could lead to significant differences in the funding that can be provided by an invoice funder, adding in a few additional assets and a true ABL financier.
A Simple Explanation
In simple terms, the idea of "how much do you want to raise?", and "what assets do you have available?" Is a very simple explanation of how true asset finance companies work.