Asset Financing 101: How to fund equipment and other assets

What is asset financing?

Asset financing describes funding approaches that use tangible assets—like equipment, machinery, receivables, or inventory—as collateral or as a source of cash. It can help businesses access capital without diluting ownership or relying solely on traditional bank loans.

How asset financing works

Asset financing generally involves a lender or financier providing funds based on the value of the asset or assets being used. Common steps:

• Identify the asset and its value
• Agree on terms such as loan-to-value (LTV), interest rate, and repayment schedule
• If required, register a lien or title on the asset to secure the financing
• Receive funds and use them for operating needs
• Repay as agreed; ownership or lease terms depend on the structure

Common forms of asset financing

Equipment financing

Lenders fund the purchase of equipment, with the equipment itself typically serving as collateral. Depending on the arrangement, you may own the asset at the end of the term or continue lease payments.

Asset-based lending

A loan secured by a pool of assets such as receivables, inventory, or other collateral. This can help smooth cash flow or bridge gaps between cycles.

Leasing

• Finance lease: you effectively rent with an option to own at the end; payments are typically amortized.
• Operating lease: shorter-term rental with no transfer of ownership; often lighter on upfront costs and useful for cash flow.

Factoring

A lender advances a portion of outstanding invoices and collects payments directly from customers, helping with working capital.

Sale-and-leaseback

You sell an asset to a financier and then lease it back, freeing up cash while retaining use of the asset.

When to consider asset financing

• You need to preserve cash for core operations while acquiring or upgrading assets.
• You want predictable payments or to avoid large upfront costs.
• Your balance sheet constraints make traditional financing less attractive.

Key terms to know

• Loan-to-value (LTV): the portion of the asset value that can be financed.
• Collateral: the asset pledged to secure the financing.
• Interest rate and fees: the cost of borrowing and any upfront charges.
• Tenor: the length of the financing arrangement.
• Ownership at end: whether you own the asset after repayment or lease it back.
• Covenants and defaults: ongoing requirements and consequences of missed payments.

How to apply for asset financing

• Gather asset details: type, age, condition, and market value
• Prepare financial statements and proof of ownership or rights to use the asset
• Compare terms from lenders or lessors, focusing on total cost and flexibility
• Understand the structure: loan vs lease, secured vs unsecured, and any covenants
• Collect documentation and submit applications to multiple providers to compare offers

Examples and use cases

• A manufacturing firm funds new machinery to increase capacity while keeping cash reserves intact.
• A distributor improves working capital by using factoring to bridge gaps between shipments and payments from customers.
• A retailer uses sale-and-leaseback to free cash tied up in inventory while maintaining access to goods for sale.