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Asset Based Finance: An Alternative Financing Means for SMEs

What is Asset Based Finance (ABF)?

ABF is a financing method that is driven by the assets of companies. Assets include current assets, such as accounts receivables and inventory, and fixed assets, such as plant and machinery. ABF allows an SME to utilize its own assets to meet its short, medium and long term funding needs.

Short term financing (up to one year)

Offered in forms like factoring or accounts receivable/inventory revolving loans.

Factoring:

A company sells all or part of its book debts to the ABF provider for cash advance (generally up to 60% - 90% of invoice value). After collection of the debt, the balance is paid to the company.

Accounts receivable/inventory financing:

A revolving loan against the entire accounts receivable and inventory of a company.

Medium term financing (one year to three years)

Based on a company's existing plant and equipment that is free from encumbrances. Can be in the form of hire purchase, leasing, sale and lease back, etc.

Long term financing (three to seven years)

A term loan based on the real estate of the company.

Benefits of ABF

Allows SMEs to maximize the benefits of their assets, to match the life of assets with that of liabilities, and to match the cash flow generated by relevant investments.

Cost of ABF

Based on the different forms of ABF, the cost may include service fees and interests. As ABF is not secured by collateral, the cost of ABF may be higher than normal banking facilities.

Special thanks to East Asia Heller Limited for supplying information for this display.