CFLA at a Glance: Asset-Based Finance

Asset-based financing is the financing of particular equipment and vehicles and related items or services, primarily by way of lease, but also by secured loan or conditional sales contract. The industry complements the work of conventional lenders and classic loans but stands alone as its own alternative way of financing.

An alternative way of financing

As its name suggests, asset-based finance is the financing of a specific asset: a vehicle or piece of equipment, commonly by way of a lease, loan, conditional sales contract or by a line of credit. The customer doesn’t actually own the equipment or vehicle; the financing company owns it until the customer buys it or returns it. The asset is the principal collateral for the customer’s obligation to make regular payments.

This has implications for both the financing company and the customer. It affects the way a financing company decides on applications. The essential determining factor is not customer net worth, as it would be in conventional lending, but cash flow. Can the customer generate sufficient revenue by using the equipment to afford the monthly payments?  From the customer’s point of view, this form of finance offers an advantage: It allows them to use vehicles or equipment without using up their regular bank credit.

Finance professionals with intimate knowledge of the asset

Asset financing is less about how much money you need and more about equipment or vehicle selection and model specifications. Since its very beginnings, the people in asset-based finance have become experts in different equipment and vehicles and how they will be used. They must understand the equipment or vehicle and its value at every stage of its useful life. From receipt of the customer’s application to the asset’s return or repossession, the finance company must know what the asset is worth and how it is used. This is crucial to safeguard its position. In the case of a lease, finance companies must accurately forecast the value of the asset in the event they get it back several years later.

A vital source of financing for the Canadian economy

The services of the leasing industry are complementary to traditional banking and other financial lending in providing incremental capital to increase the pool of available credit in Canada and provide a vital competitive alternative in the financial services sector.