Traditional financiers view asset based lending as a last resort option, however, with a tight credit market combined with lower than expected results, many financial specialists view this as a viable alternative method of funding. Asset based lending helps give collateral to reduce the risk on the part of the lender, thus decreasing the amount of money down on a loan in a time where liquidity on the part of business owners is scarce. Furthermore, most savvy businessmen will invest in assets such as gold, commercial real estate, residential real estate, bonds, diamonds, and more to reduce the tax burden on liquid assets and is a great asset management and wealth creation strategy.

During business downturns, companies can use asset based lending to acquire the financing and funding needed for commercial real estate projects, humanitarian projects, alternative energy ventures, expansion of current operations, or other activities. Asset based lending can also be seen as a way to obtain bridge loans for interim financing and create liquidity to push through tough times.

So how does asset based lending work? An asset (accounts receivable, equipment, inventory, real estate, gold, bonds, diamonds, financial instruments) provides a certain value which the bank will lend upon or use to decrease the risk of a lending transaction. Business financing and funding may come in the form of revolving lines of credit, installment loans, equipment leases, or other. This may be beneficial in a number of situations as listed below.

Acquisitions: Principal owners of businesses may seek a strategic partner or attempt to acquire a competitor. Asset based lending provides a viable means to fund these ventures.

Turn around: Asset based lending may help provide interim liquidity to help turn around a business by providing necessary funds for increased marketing, increased staff, or advertising. In some cases it may even help prevent bankruptcy.

Growth: Growth and expansion requires financing. Moreover, as a company grows, so does its assets, which may help increase it's ability to borrow funds.

Capital Expenditures: Capital expenditure, also known as capital spending or capital expense, is a manner to use funds to acquire or upgrade the businesses physical assets, for example equipment upgrades or buildings.

Asset based lending/financing offers many benefits such as having fewer covenants when compared to other types of financing, increased flexibility, and instills discipline. Since loans are based on accounts receivable, inventory, the company becomes motivated to improve cash flow and speed up production cycles. A few disadvantages may be its perceived higher risk among some CFOs and also it's higher interest rate. In the end, each business cash flow needs should be assessed on a case by case basis to determine what type of financing or funding it right for them.