To generate working capital or to meet specific short-term cash needs, small
businesses may use certain short-term assets as collateral
for commercial loans. The most common types of asset-based financing are the
- Accounts receivable financing
uses the receivables as collateral. As the business collects the
receivables, the proceeds are used to repay the loan or line of credit.
- Inventory financing is a similar
type of loan, using inventory as collateral.
- Factoring is a process whereby accounts
receivable are actually sold to a third party (the factor) for a discount
price, after which the factor takes on the job of collections.