Meaning of Asset Financing

Asset financing generally refers to loan availed by companies on the basis of financial strength of the company. It is used for the growth and expansion of business to save on paying the full value of the asset outright. The asset’s amount is divided into small regular payments along with interest for the unpaid portion. The payment obligation and the ownership rights of the borrower change depending on the method of asset financing.

Difference between Asset Financing and Loan

Under asset financing, the lending is not in the form of a conventional loan where lender gives one single payment to the borrower. Rather, the payment is spread over a period of time. This saves the business from paying one big amount for purchasing an asset in the form of machinery, vehicle, etc.

Reason Why Businesses Prefer Asset Financing

With technology and innovations growing in every field, businesses are in constant need of money to purchase new assets. Asset financing is a mechanism to provide business with the necessary cash flow to meet this need.

Purchasing a new asset in cash can be risky as not all businesses have the required financial capability. Moreover, a capital expenditure for buying costly assets can lead to cash flow problems resulting in a shortage of working capital. A working capital crunch can hamper the regular functioning of the business. This is where the role of asset financing becomes important.

Types of Asset Financing

Asset Financing includes the following types:

Credit Risk Associated with Asset Financing

Banks and other financial institutions act as lenders in asset financing. Asset financing is relatively safer for the banks and other financial institutions than giving a conventional loan to the borrowers. In asset financing, the lending institutions’ finance is secured by the value of asset financed. Moreover, in most of the cases, the finance value is even secured through a collateral security. If the borrower fails to repay the borrowed money, the lender can seize the asset and sell the same in open market to recover the money.

The major concern for the financial institutions is that when the asset is sold in the secondary market after their seizure; the risk of decline in the value of the asset always looms over their head. To overcome the risk, financial institutions finance the asset considering that the contingent claim is going to arise on the asset and accordingly they frame the lending terms. The major benefit to financial institutions is, they get regular interest on the lent amount and also they have the right to seize the asset in case of non-payment of principal or interest by the borrower.


Asset financing is a boon to the business. If a business is willing to expand, asset financing is a perfect solution for their financial needs. The businesses now don’t need huge cash in hand before purchasing any new asset; instead, they can just finance it via asset financing. Asset financing is not only beneficial for the borrowers but also to the financial institutions who lend the money, as they get regular interest and their risk is covered with assets kept as collateral security.


Last updated on : January 6th, 2018
What’s your view on this? Share it in comments below.

About The Author

Sanjay Bulaki Borad
Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

Leave a Reply

Recourse vs Non Recourse Debt
  • External Commercial Borrowing (ECB)
    External Commercial Borrowing (ECB)
  • Lease Finance vs Installment Sale
    Lease Finance vs. Installment Sale
  • .Credit Appraisal of Term Loans by Financial Institutions like Banks
    Credit Appraisal of Term Loans by Financial …
  • Invoice Factoring Process
    Invoice Factoring Process
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Recent Posts

    Find us on Facebook

    Related pages

    gdr & adrcumulative redeemable preference sharesasset coverage ratio formulasimple definition of debenturesadvantages of variable costingearning retention ratioddm model excelmeaning of hedging in financeirredeemable debt definitionmulti stage dividend growth modelatr financedefinition of rationing in economicshedging strategy definitionacid test ratio formuladisadvantages of financial statement analysismirr finance ratedividend growth model advantages and disadvantagesdividend theoriesdividend policy irrelevanceytm in financeprofitibility indexfixed asset turnover calculatordifference between incremental and differentialdcf valuation formulapayout ratio calculationdividend relevance theory pdffactoring in financial managementprimary goal of managerial accountinghow to calculate stock turnover ratiohow to calculate dividend payoutdescribe the assumptions underlying cvp analysisclosing inventory holding perioddefinition of rationingtypes of m&akinds of bill of ladingoverdraft and cash creditpayback method disadvantagesexplain profit maximizationvarious capital budgeting techniqueshow to calculate wacc from balance sheetnoi calculationwhat is the difference between leasing and hire purchasecost ratio formulacalculating payback period and npvdef liabilitywacc meansreceivables turnover ratio formuladeferred payment meaning in hindidividend growth valuation modelcreditor days formulabookkeeping definition accountingdeterminant of dividend policycalculate payback period uneven cash flowsdifference between lessee and lessorfinancial statements and ratio analysisdisadvantages of incremental modelbank overdraft accountingvariable cost examples in accountingfinancial ratios formulas and explanationstraditional budgeting advantages and disadvantagesinitial outlay calculatormodigliani miller proposition 1meaning of wealth maximizationcash profit ratiosecured redeemable non convertible debentures meaningmiller & modiglianioperating income and ebitdefinition of transaction exposurewhat is cash operating cyclewelfare maximization definitionwacc analysis