Asset Financing

  

Asset financing occurs when a business uses its assets to obtain a loan. Usually, a loan is granted after a business proves its income, has an established, and good, credit history, and all that jazz. This type of financing simply concentrates on what assets the business is showing on their inventory, accounts receivable and investments.

It's sort of like taking a personal loan on your house...you are offering the bank the right to take your house if you default. In this case, it's a business offering their assets in a similar way. This type of financing is especially popular with smaller businesses or those with more stuff than credit.

Related or Semi-related Video

Finance: What are Accounts Payable and A...111 Views

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Finance- a la shmoop what are accounts payable and accounts receivable? easy. they're

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accounts. they live on the balance sheet right here and here. accounts payable [balance sheet shown]

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refers to bills you owe for stuff you bought or committed to buy. accounts

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receivable refers to stuff you sold, and are you know waiting to be paid for.

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you're the CEO of Shmesla. you make flying electric cars. you've built a

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thousand of these units and they're ready to sell. the machine takes five

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grand worth of aluminum ,eight grand worth of computers, three grand for the

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blades, and so on. so flying schmess la in total costs 50 grand to build then sells [equations]

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for about 80 grand each. only problem with your build of inventory you didn't

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have the money to pay for all of the equipment that goes into the Shmesla

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up front. so you cut a deal with your suppliers to pay them six months after [forklift]

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they've shipped you that construction materials. by building a thousand units

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you'll spend 50 million bucks on raw materials ordered on credit, which shows

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up on your balance sheet as a short-term liability, in the accounts payable slot [balance sheet]

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right there 50 million. well as sales come in, yeah cha-ching, cha-ching, cha-ching,

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you feel ready to pay off at least one of your suppliers, and send them a check

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for a million bucks .and that cool million shows up as an expense on your [hands exchange check]

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income statement, and your accounts payable figure declines by a million

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bucks .your sales end up being solid you quickly sell 500 units you built for 80

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grand each and that's half your stock. unfortunately the buyers can't pay you

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right away they promise to pay you in writing within 120 days of taking [hand signs document]

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possession of the Schmesla. so that's 500 Schmeslas for 80 grand each

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giving you 40 million bucks worth of accounts receivable that you show on

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your books right there. well a few months go by and you start to collect. some

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buyers pay early a quick 500k comes in as buyers pay off their Schmeslas, and [men in suits]

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that 40 million in accounts receivable is now 35 million, and that five million

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plops right in your cash account at the old Bank of America. you feel good [bank of America logo]

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about the business and hate having accounts payable, so you take 4 million

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of that 5 million bucks in cash, and well you pay some bills you pay down the 49

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million you owed ,you now be 45 million in accounts payable.the contracted for

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payments of the Shmeslas all come in and another 35 million dollars comes in [men stand by stacks of cash]

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the door, taking away all of the remaining thirty five million dollars in

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accounts receivable so that account now goes to zero, and that thirty five

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million bucks well it gets dumped into your cash account, which now has 36

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million dollars in it. why well because you had a million dollars sitting there

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from the first set of payments remember? you still owe 45 million bucks in your

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accounts payable but you can bring that obligation down fast by paying 30 [hands exchange check]

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million down immediately and make your suppliers dance. so what are the key

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factors of your balance sheet at this point? well you have five million in cash

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nice asset that cash there. you have five hundred cars yet unsold you think you

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can get 80 grand each for them or 40 million dollars in revenues to you. you

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hold them as inventory on the asset side of the balance sheet right here. you are

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no longer owed anything because all the buyers who bought your first 500 cars [car flies through the air]

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have now paid you. and while you owe another 15 million bucks to your

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suppliers to clean them up so don't start strutting around like you're Elon

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Musk just yet you've still got a ways to go before Schmesla Galactic can found

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its first colony on Mars. schmooping in space yeah it's a dream come [man in space suit meets alien]

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true.

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