Asset-based financing refers to loans secured by assets and in particular loans backed by inventory or accounts receivables. The phrase does not refer to mortgages or vehicle loans, although those loans are also backed by collateral. In most cases, business owners do not use asset-based financing as startup capital. Rather, they turn to these loans while they are in business.
Loans secured by inventory are floating asset loans. Floating means the value of the underlying asset, or the inventory, is always fluctuating. Under the terms of these loans, business owners may sell their inventory, restock it, and sell it again. However, if they default, the lender may seize their inventory.
Alternatively, business owners use accounts receivables as collateral. With these loans, the lender pays a percentage of the unpaid invoices upfront, and as the invoices are paid, the lender gives the remaining balance minus a fee to the business owner.