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Simple English definitions for legal terms
asset-based financing
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A quick definition of asset-based financing:
Asset-based financing is a way of borrowing money where lenders and investors look at the cash flow from a specific asset to repay the loan. This means that the borrower uses an asset, like a car or a building, as collateral for the loan. If the borrower can't repay the loan, the lender can take the asset. Asset-based financing is often used for big projects like power plants or mines.
A more thorough explanation:
Asset-based financing is a type of lending where lenders and investors rely on the cash flow generated by a specific asset to repay the loan. This method of financing is often used when traditional financing options, such as bank loans, are not available or sufficient.
- Floor-plan financing: A car dealer may obtain a loan from a manufacturer to purchase inventory. The loan is secured by the merchandise, and as the cars are sold, the loan is paid off.
- Project financing: A power plant may require a large amount of funding to be built. The lender provides the funds, and the plant's output (such as electricity) is used to repay the loan.
These examples illustrate how asset-based financing works. In floor-plan financing, the loan is secured by the inventory, and as the cars are sold, the loan is repaid. In project financing, the lender relies on the revenue generated by the power plant to repay the loan.