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 is Loan To Value (LTV)?3 Views

00:00

Finance allah shmoop What is the loan to value ratio

00:06

or ltv All right Well this is the value of

00:11

your house for hundred grand This is your down payment

00:15

one hundred grand And this is your loan of three

00:20

hundred grand loan to value Yeah It's a fraction easy

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Three hundred grand over four hundred grand or three over

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four or seventy five percent Well what does that mean

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Like why do we even care about loan to value

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ratio Well because they speak volumes as to how risky

00:37

the loan is to the bank or whoever is lending

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the dough in this transaction Should you know things go

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awry like you get hit by bus and you can't

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pay it back How does a bank it's loan back

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So you want a low loan to value ratio if

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you're the lender because well the worst thing that happens

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is that you repossess whatever the asset was that was

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pledged as collateral against a loan You just sell it

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to somebody else So what are the odds You could

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get your money back if you're the bank who loan

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three hundred grand against a home that just sold for

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four hundred grand Could you drop the price tow three

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eighty and then pay twenty thousand dollars in realtor costs

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and all the stuff that goes with it And then

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you're down to three sixty and maybe there's some other

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costs and their ten grand or so you get all

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your three hundred thousand dollars loan back and probably fifty

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grand to boot and in theory that might go to

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the cellar but it probably all go to the banks

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lawyers So this equation works great with homes because over

01:31

time holmes generally go up in value knock down because

01:35

there's more people coming onto the earth again and again

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just checked global warming if you're curious about that So

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holmes worked great for mortgages and generally accrue lower loan

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to value ratios over time But how does this work

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when you take out a car loan Yeah cars are

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essentially never an investment They're just a money pit They

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just go down in value So you really wanted that

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forty two two thousand dollars convertible prius with the turbo

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charging battery which gave it a zero to sixty rating

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of seven point eight seconds rather than the standard prius

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Rating zero to sixty of just yes problem You put

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ten thousand down and borrowed thirty two grand on what

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you hoped would be a five year loan Unfortunately six

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months after you drove off the lot the market value

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of your turbo prius is only something like thirty thousand

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dollars maybe less And in that time period you've only

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paid four thousand dollars of principal down on your loan

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So you still owe twenty eight thousand bucks on an

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asset that today would sell form them maybe thirty and

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after commissions transaction costs and lawyer hassle Well it'd certainly

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be worth less than that much money toe whoever had

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to repossess the car and then sell it that's why

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they charge you so much interest rate on car loans

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and only can't blame him Cars suffer this very difficult

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loan to value equation all the time and it's part

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of the reason that car loans air made so difficult

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especially when you go through a dealer and why they

03:03

push you hard to put down a whole lot of

03:05

money up front So the big idea here hi l

03:07

tvs are bad low lt v's are good lenin doubt 00:03:11.5 --> [endTime] Go turbo

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